2010 (2) TMI 118 - AAR - Income Tax

Supply of hardware in India DTAA with Singapore Permanent Establishment ( PE ) - A non-resident company in singapore is engaged in the business of manufacture and sale of Hard Disk Drives - It has been supplying Disks to Original Equipment Manufacturers (OEMs) in India. The applicant states that in order to minimize the delays in the procurement of inputs from the applicant, the OEM has proposed to put in place a Vendor Managed Inventory (VMI) model. Under the VMI model, the applicant would enter into agreements with Independent Service Providers (ISPs) in India who would stock disks in India on behalf of the applicant and deliver the same to the OEM on a Just-in Time basis Held that - By merely outsourcing the operations leading to supplies of products, it cannot be said that the applicant does not carry on any business in India from a fixed place. The ground realities cannot be disregarded. The question whether the person carrying on business operations on behalf of or pursuant to the instructions of the applicant is a dependent or independent agent is not very material in considering the applicability of Art.5.1. The business of the applicant at a fixed place is being carried on through the media of the warehouse provider who can also be characterized as service provider. Having regard to these facts and features, we have to accept the contention of the Revenue that the demarcated space in the warehouse of ISP constitutes the fixed place of business within the meaning of Art.5.1 of DTAA. - For the purpose of computation of profits of the PE in relation to the sales activity in India, it should be treated as a separate and distinct enterprise wholly independent of the enterprise of which it is a PE. The amounts paid to ISP/YCH and other expenses, if any, incurred should be deducted.

Summary

Issues Involved:
1. Existence of a Permanent Establishment (PE) under Article 5(1) or 5(8) of the India-Singapore Double Taxation Avoidance Agreement (DTAA).
2. Attribution of further income to the PE under Article 7 of the India-Singapore DTAA if the service provider is remunerated on an arm's length basis.

Detailed Analysis:

Issue 1: Existence of a Permanent Establishment (PE) under Article 5(1) or 5(8) of the India-Singapore DTAA

Questions (a) and (c):

The applicant, a non-resident company incorporated in Singapore, sought an advance ruling on whether it has a PE in India under Article 5(1) or 5(8) of the India-Singapore DTAA through its activities involving Vendor Managed Inventory (VMI) models and agreements with Independent Service Providers (ISPs) and YCH Logistics (India) Pvt. Ltd. (YCH).

Legal Framework:
- Section 5(2) of the IT Act: A non-resident is liable to be taxed in India on income accruing or arising in India.
- Section 90(2) of the IT Act: Provisions of the IT Act or DTAA, whichever is more beneficial to the assessee, shall apply.
- Article 5 of the DTAA: Defines PE as a fixed place of business through which the business of the enterprise is wholly or partly carried on. Includes place of management, branch, office, factory, workshop, and warehouse.
- Article 5(8) and (9) of the DTAA: Deals with agency PE, defining conditions under which an enterprise is deemed to have a PE due to activities of an agent.

Applicant's Contention:
The applicant argued that it does not have a fixed place PE or agency PE in India as it has no premises, facilities, or installations owned, leased, or kept at its disposal in India. The goods are stored in warehouses owned and operated by ISPs or YCH, and the applicant has only restricted access for inspection purposes.

Department's Stand:
The Department contended that the applicant has a PE in India as the warehouses of ISPs or YCH should be treated as the applicant's PE. Alternatively, it was argued that an agency PE exists.

Ruling:
The Authority concluded that the applicant does have a fixed place of business in India, which is the focal point of its business operations. The fixed place of business is the warehouse space provided by YCH or ISPs, which is earmarked for the applicant's use. The Agreement between the applicant and YCH indicates that the warehouse space is specified, and the applicant's products are segregated and managed with electronic data interchange systems. The applicant's right to enter the warehouse for inventory, inspection, and audit purposes further supports the existence of a fixed place of business.

The Authority found that the business of the applicant is being carried on through the warehouse/service provider, and the demarcated space in the warehouse constitutes a fixed place of business within the meaning of Article 5(1) of the DTAA.

Conclusion:
The applicant has a PE in India within the meaning of Article 5(1) of the DTAA. The Authority did not find it necessary to discuss the existence of an agency PE under Article 5(8).

Issue 2: Attribution of Further Income to the PE under Article 7 of the India-Singapore DTAA

Questions (b) and (d):

Legal Framework:
- Article 7 of the DTAA: Governs the attribution of profits to the PE. Profits attributable to the PE are those which the PE might be expected to make if it were a distinct and separate enterprise dealing independently with the enterprise of which it is a PE. Deductions for expenses incurred for the business of the PE are allowed.

Ruling:
The Authority held that for the purpose of computing the profits of the PE in relation to the sales activity in India, the PE should be treated as a separate and distinct enterprise. The amounts paid to ISPs/YCH and other expenses incurred should be deducted.

Conclusion:
The profits attributable to the PE should be computed by treating the PE as an independent enterprise, with deductions for expenses incurred.

Final Ruling:
The Authority ruled that the applicant has a PE in India under Article 5(1) of the DTAA, and the profits attributable to the PE should be computed as per Article 7 of the DTAA, considering the PE as a separate and distinct enterprise. The ruling was pronounced on the 25th day of February, 2010.