Section 6 contains detailed criteria of who is considered as Resident in India and provides

that anyone who doesn’t meet these criteria is Non-Resident. Liability to pay tax in India
does not depend on the nationality or domicile of the Tax payer but on his residential
status.

An individual will be qualified for Non Resident (NR) if He/ She satisfies the following
conditions which are as follows:

• In a financial year if an Individual stay in India for less than 181 days and
• In a financial year If an Individual stay in India for not more than 60 days
• If an Individual stay in India which exceed 60 days in a financial year but doesn’t
exceed the 365 days or more during the 4 previous financial years.

The status of a person as a resident or non-resident depends on his period of stay in India.
The period of stay is counted in number of days for each financial year beginning from 1st
April to 31st March (known as previous year under the Income-tax Act).

Income Deemed to Accrue or Arise In India – As per the provisions of Section 5(2)(b) of the Act,
the total income of a non-resident also includes all income which accrues or arises or is deemed to
accrue or arise in India to the non-resident. – To check whether the income of the non-resident is
deemed to accrue or arise in India–We have to refer Section 9. – If the income is deemed to accrue
or arise in India, then the payer is liable to withhold taxes in India.

SECTION 9: Following shall be deemed to accrue or arise in India:

Section9(1)(ii)– Income which falls under the head “Salaries” ,if it is earned in India, i.e. when the
services are rendered in India [Tax deductible u/s. 192]

Section9(1)(iii)– Salary payable by the Central Govt. to a citizen of India for services rendered outside
India [Tax deductible u/s. 192]

Section9(1)(iv)– Dividend paid by an Indian company outside India.

SECTION 9(1)(v) –INTEREST Income by way of interest payable by a Resident shall be deemed to
accrue or arise in India except if amount used for business or profession carried on by such person
outside India or for the purposes of making or earning any income from any source outside India.

SECTION 9(1)(vi) –ROYALTY Income by way of royalty payable by a Resident shall be deemed to
accrue or arise in India except where the royalty is payable in respect of any right, property or
information used or services utilized for the purposes of a business or profession carried on by such
person outside India or for the purposes of making or earning any income from any source outside
India.

SECTION 9(1)(vii) –FEES FOR TECHNICAL SERVICES Income by way of fees for technical services
payable by a Resident, except where the fees are payable in respect of services utilized in a business
or profession carried on by such person outside India or for the purposes of making or earning any
income from any source outside India.
SECTION 9(1)(viii) –SUM OF MONEY Income arising outside India, being any sum of money referred
to in Section 2(24)(xviia), paid on or after 5th July, 2019 by a resident to a non-resident / foreign
company shall be deemed to accrue or arise in India.

Section 2(24)(xviia) includes in Income-any sum of money covered u/s. 56(2)(x) of the Act.

However, Gift of any sum of money from relative shall not be liable for withholding tax obligation u/s.
195.

SECTION 9(1)(i) – Income other than Interest / Royalty FTS / Salaries / Dividend All income accruing
or arising, whether directly or indirectly, through or from

• Business connection in India Property in India

• Asset or source of income in India
• Transfer of a Capital asset situated in India

For the removal of doubts, it is here by declared that for the purposes of this section, income of a
non-resident shall be deemed to accrue or arise in India under clause (v) [Interest] or clause (vi)
[Royalty] or clause (vii) [Fees for technical services] of sub-section (1) and shall be included in the
total income of the non-resident, whether or not:

The non-resident has a residence or place of business or business connection in India; or √ The non-
resident has rendered services in India. Withholding tax obligation u/s. 195

• If the payment to non-resident or a foreign company is covered u/s. 9 of the Act and
chargeable to tax, the provisions of Section195 of the Act shall come into play.
• As per Section 195 (1)–Tax is required to be deducted at the time of payment or credit,
whichever is earlier at the rates in force.
• Further, TDS u/s. 195 is also required to be withheld at the time of making provision on
accrual basis the payee is identified and amount is ascertainable.

PERMANENT ESTABLISHMENT

Any person who is responsible for paying any sum being royalty or fees for technical services to a
non-resident / foreign company carrying on business through a Permanent Establishment (PE) in
India shall deduct tax u/s. 195 of the Act at the rate of tax at applicable rates.

Thus, for payments to Foreign Companies having a PE in India:

If amount exceeds Rs.1 Crore: 40% + 4% Cess + 2% Surcharge (42.432%)

If amount exceeds Rs.10 Crores: 40% + 4% Cess + 5% Surcharge (43.68%)

What was The Need to amend The Rule of Permanent Establishment?

The permanent establishment rule as explicated in Article 5 of the Model Convention,[11] has a
robust normative infrastructure in international tax law. The general meaning of the article is to
demonstrate the right of one contracting state (the source state) to tax the profits of an enterprise of
another contracting state (the resident state).[12] As per the definition in Article 5, the term
‘permanent establishment’ means ‘a fixed place of business through which the business of an
enterprise is wholly or partly carried on’.[13] The Commentary on Article 5 provides more
transparency on its interpretation and on the criteria for creating a PE,[14] namely that:

1. It must be a fixed place of business;

2. It must be fixed with a certain degree of permanence; and
3. The business of the enterprise must be carried on through the fixed place of business.

In the case of CIT v. Vishakapatnam Port Trust, a landmark decision on the subject of Permanent
Establishment, the Andhra Pradesh High Court held that The words Permanent Establishment
postulate the existence of a substantial element of an enduring or permanent nature of a foreign
enterprise in another, 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 onto the soil of another country.

The scope of the term business connection was widened in the Budget 2018 by inserting a new
Explanation 2A of §9(1)(i) of the Act, according to which a non-resident shall be said to have a
‘business connection’ in India if the non-resident has a ‘significant economic presence’ in India.

Business connection as a concept is based in the source theory of taxation to justify the source
country’s right to tax income arising from activities carried in that country, provided certain
prescribed nexus thresholds are satisfied.

In the case of ABB FZ-LLC v. Deputy Commissioner of Income Tax, the Court held that application of a
virtual PE does not require the non-resident company to have physical presence in India.

Section 195 of the Income-tax Act, 1961

A person (resident or non-resident) responsible for making payment to a non-resident or foreign

company of any interest or any other sum (not being salary) is required to deduct tax at source under
section 195, if in the hands of the recipient such payment is chargeable to tax in India. Tax is
deductible at the time of payment or at the time of credit to the account of payee, interest payable
account, or suspense account, whichever is earlier. Tax is deductible at the rates prescribed by the
relevant Finance Act.

TDS liability under section 195 arises only when income is credited to the account of payee or on
actual payment of same, whichever is earlier and mere accrual of income in hands of foreign
company would not be sufficient proximate reason for tax deductors liability under section 195—J.
International Hotels Ltd. v. ITO (TDS) [2001] 79 ITD 506 (Delhi).

Payment to non-resident/foreign company is covered by section 195, whether payment is made

within India or the payment is made outside India. The status of the payment or the source of the
payment is not a relevant consideration while applying the provisions of section 195—Satellite
Television Asian Region Ltd. CIT [2006] 99 ITD 91/99 TTJ 1025 (Mum.)

Tax is deductible under section 195 whether the deductor is resident (or non-resident). Tax is
deductible even if the non-resident deductor does not have any place of business, residence,
business connection (or any other presence) in India.

When the payment of credit is given to a non-resident/foreign company and in the hands of the
recipient, income is taxable in India, tax is deductible by the payer under section 195. If, however,
such payment or credit is covered by some other sections, tax is deductible under that section and
not under section 195. For instance, salary payments are covered by section 192. If salary is paid to a
non-resident, tax is deductible under section 192 and not under section 195. Likewise, if tax is
deductible under sections 194E, 194LB, and 194LC, the provisions of section 195 are not applicable.

With effect from June 1, 2015, the person responsible for paying to a non-resident/foreign company,
any sum (whether or not chargeable under the provisions of this Act in the hands of recipient) shall
furnish the information relating to the payment of such sum, in such form and manner, as may be
prescribed.

Foreign companies and Permanent Establishment (PE)

Foreign Companies

♠ Foreign company means a company which is not a domestic company, i.e. a company registered
outside India in any other foreign country. [Section 2(23A)]

♠ The Foreign Company may be treated as Domestic Company if such company makes prescribed
arrangement in India as per Rule 27.

♠ Prescribed arrangement means an arrangement to be made by a company for the declaration and
payment of dividends (including dividends on preference shares) within India shall be as follows:

1. The share-register of the company for all shareholders shall be regularly maintained at its principal
place of business within India, in respect of any assessment year from a date not later than the 1st
day of April of such year.

2. The general meeting for passing the accounts and for declaring any dividends shall be held only at
a place within India.

3. The Dividend declared, if any, shall be payable only within India to all shareholder

♠ Foreign Company is treated as Resident in India if its Control and Management is located wholly in
India.

♠ Foreign Company is treated as Non-Resident in India if its Control and Management located wholly
/ partially Outside India.

Permanent Establishment

As per section 92F(iiia) of Income Tax Act, 1961, ‘Permanent Establishment’ includes a fixed place of
business through which the business of the enterprise is wholly or partly carried on.

Further, as per section 90 of the Act, the Central Government has the power to enter into an
agreement with other country for avoidance of double taxation or for the exchange of the
information or for recovery of Income Tax under this act. These agreements are generally called
DTAA agreement and may also called as Tax Treaties.
India has one of the largest networks of tax treaties for the avoidance of double taxation and
prevention of tax evasion. The country has Double Tax Avoidance Agreements (DTAAs) with over 85
countries under Section 90 of the Income Tax Act, 1961

Also, as per section 90(2) of the Act, if the DTAA provisions are more beneficial for an assessee than
the provisions of Income Tax Act, then he may follow DTAA provisions. Therefore, the provisions of
DTAA will supersede the provisions of Income Tax Act to the extent they are more beneficial to the
assessee.

DTAA:

Double taxation is the practise of taxing the same income or subject-matter twice, for the same
purpose, over the same time period, and in the same tax jurisdiction. When such income is taxed in
two countries, the total tax liability will constitute a sizable portion of his total income.

As an example, In 1920, the League of Nations formed a group of four world-renowned economists,
Prof. Gijsbert, Prof. Luigi Einaudi, Prof. Edwin Seligman, and Prof. Josiah Stamp, to recommend
certain International taxation rules for allocating taxing rights under Double Taxation Avoidance in
order to avoid multiple taxes on the same income. The Group had suggested dividing the right to
taxation between the country of residence and the country of origin while recognising taxing rights.

The current Rules, without a doubt, are an extension of those recommendations. The Double
Taxation Avoidance Agreement (DTAA) is an agreement between two countries that non-residents'
income should not be taxed in both their country of origin and the country where they live. The
Fiscal Committee of the League of Nations created the first model forms in 1927.

In terms of India, its agreements are based on the UN model of double taxation avoidance
agreements. As previously stated, these agreements are used to allocate jurisdiction between the
source and residency. The Agreements themselves specify the maximum rate of taxation that can be
charged in the source country, which is generally lower than the rate of taxation in that country.
Sections 90 to 91 of Chapter IX of the Income Tax Act of 1961 are concerned with 'Double Taxation
Relief.'

As a result, India has entered into DTAA agreements with 88 countries of various types, including
Comprehensive, Intergovernmental Agreement to Improve International Tax Compliance, Limited
Agreements, Limited Multilateral Agreements, Specified Associations Agreement, Tax Information
Exchange Agreement, and other agreements.

In these DTAA agreement, the broad definition of Permanent Establishment has been elucidated and
most of the agreements has adopted the definition of OECD’s Model Tax Convention on Income and
on Capital (version 2017).

Here, we would like to briefly explain the provision of Article 5 of the said convention.

Article 5 states that ‘PE’ means a fixed place of business through which the business of an enterprise
is wholly or partly carried on. The same as taken in section 92F(iiia) of Income Tax Act, 1961.

Article 5 further explains that term ‘PE’ especially includes,

• place of management;
 • a branch;
• an office;
• a factory;
• a workshop, and
• a mine, an oil or gas well, a quarry or any other place of extraction of natural resources
• a building site or construction or installation project constitutes a permanent establishment
only if it lasts more than twelve months

Where a person is acting on behalf of an enterprise and has authority to conclude contracts in the
name of that enterprises in other country, then that enterprise shall be called to have a ‘PE’ in that
other country.

However, if the activity of that person is limited to the activity mentioned below exercised through
fixed place of business in other country, then that enterprise shall not be said to have ‘PE’ in that
country,

• the use of facilities solely for the purpose of storage, display or delivery of goodsor
merchandise belonging to the enterprise;
• the maintenance of a stock of goods or merchandise belonging to the enterprisesolely for
the purpose of storage, display or delivery;
• the maintenance of a stock of goods or merchandise belonging to the enterprisesolely for
the purpose of processing by another enterprise;
• the maintenance of a fixed place of business solely for the purpose of purchasinggoods or
merchandise or of collecting information, for the enterprise;
• the maintenance of a fixed place of business solely for the purpose of carryingon, for the
enterprise, any other activity of a preparatory or auxiliary character;

However, also, if that person is a broker, general commission agent or any other agent of an
independent status, then that enterprise shall not be said to have a ‘PE’ in that country.
Commissioner Of Income-Tax, Andhra ... vs Visakhapatnam Port Trust on 17 June, 1983
Andhra High Court.

FACTS: The assessee is the Visakhapatnam Port Trust (hereinafter called the "Port Trust"). The Port
Trust is under the Ministry of Shipping and Transport, Govt. of India. The Visakhapatnam Port exports
a large amount of iron ore. In order to speed up the export operations, the Port Trust felt it necessary
to install a plant known as "Bucket Weel Reclaimer". The purpose of this was to remove iron ore
mechanically from the wharfs and put it on a conveyer belt which takes the ore directly into the ship.
Global tenders were called for by the Port Trust in June, 1967. A German company known as M/s.
Maschinenfabrik Buckau R. Wilf (hereinafter called at the "German company) tendered a contract for
supply of the Bucket Wheel Reclaimer on June 26, 1967.

After several negotiation the contract was finalised on 12th September, 1968.

The terms of the lengthy contract dated September 12, 1968, may be briefly noticed. The German
company, (i) undertook to supply and deliver to the Port Trust one Bucket Wheel Reclaimer as per
drawing, and(ii) to delegate one engineer-erector for supervising the total erection and one special
fitter for installation of electrical equipment. It is not in dispute that the engineer-erector delegated
was Mr. Bremer and that no special fitter was delegated. The period of contract was 131/2 months
and shipments were to be so effected that the material would arrive at the Visakhapatnam Port in
ten months.

DM 1,700,276 = (DM 1,399,860+DM 210,416) DM 1,610,276 + DM 90,000 was payable in Germany.

5% of the above amount was payable at the conclusion of the contract, 10% by opening letters of
credit in four weeks and 85% (DM 1,445,240) in 20 equal semi-annual installments each of DM
72,22262, of which the first installment was payable as soon as the Port Trust certified that the unit
was ready. For the credit remaining after payment of each of these installments, interest was to be
paid by the Port Trust at 6% p. a. The deferred payment was to be guaranteed by the State Bank of
India. The interest portion for the deferred payment was DM 451,637. Of course, the figures were to
be redetermine according to the formula agreed in the price variation clause which depended on
such variable factors like "the mixed material price" and the "standard wage" in Germany which
would vary from time to time.

The German company had to supply the mechanical equipment, the structural steel-work, the
lubrication system, the rubber-belting, the electrical equipment, ballast and spares.

Rs. 9,19,000 : This amount was payable to the German company towards the supply of certain items.
But the invoice had to be made out by the person appointed by the German company, vide para.
12(b) and the address and the bank account would be informed to the Port Trust by the German
company. 10% of this amount was to be paid at the time of signing the contract, 40% in six months
and 50% when the German company informed that the items were ready.

Rs.. 22,000 was to be paid for the erecting supervising staff. Out of this 20% was to be paid at the
commencement of the erection and 80% in monthly installments as demanded by the German
engineer.
In case of delayed payments, clause 12(c) Provided that the German company shall be entitle to
claim interest on arears at 6% p. a.

The contract proceeds on the basis that the German company is to send all the parts. But cls. 7 and
17 do contemplate the employment of a sub-contractors or sub-supplier. What work is to be given to
the subcontractor is also not mentioned in the contract., All that we get is that Rs. 9,19,000 is set
apart to be paid to the sub-contractor upon the direction of the German company.

Later, an Indian company incorporated under the Indian Companies Act known as the Buckau-Wolf
India Engineering Works Ltd, Pimpri, near Poona (hereinafter called the Poona company), came into
the picture. It is common ground that the Poona company is not a subsidary of the German company
nor is it, in any manner whatsoever, controlled by the German company. This Poona company was
employed to fabricate a single thick steel sheet. Such of the items (items 13 to17 of the contract)
which the German company manufactured in Germany and dispatched to Bombay Port were to be
firmly imbedded on the steel plate (Boom) by the Poona company and delivered at Visakhapatnam
where the items which would be directly sent by the German company to the Visakhapatam Port
were to be put on the said plate under the supervision of the German engineer, Mr. Bremer.

Before the Tribunal the assessee raised the question that the tax was not payable in India in view of
the Indo-German Double Taxation Avoidance Agreement (hereinafter called "the Agreement" for
brevity). The Tribunal thought it fit to consider the question of the applicability of the Agreement
inasmuch as it would be unnecessary to decide all other question in the event of the assessee
obtaining the benefit of the said agreement. There was no objection on behalf of the Revenue before
the Tribunal for considering the applicability or otherwise of the said Agreement to the facts of the
case.

DECISION: A "Permanent establishment" connotes a projection of the foreign enterprise itself into
the territory of the taxing state in a substantial and enduring form : (vide F. E. Koch's Book on the
Double Taxation Conventions published by Stevens & Sons, London., 1947, Vol. I, at p. 51, quotating
Mitchell B. Caroll before the sub-committee of the committee of U. S. Senate Foreign Relations). It is
common practice for an enterprise which carries on trade or business in one country to expand its
operation, with out incorporation or further incorporation into another country, for it then has a
branch there, or a permanent establishment which can be regarded as having sufficient presence in
that country to make then tax-able there in the same manner as the residents of that country.
(Harvey Mc. Gregor, Old Exemptions - New Credits. The or Permanent Establishment under the
Double Taxation Agreements between U. K. and U. S. A.-1 (British Tax Review [1977] Pt. 6, p, 327).

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.

The contract between the parties did not contemplate any work of installation or assembly or the
like to be performed by the German company. As already stated, the contract was limited to the
supply of the items from Germany and to the delegation of an expert engineer to supervise the
installation or assembly work to be conducted by the Port Trust.

The words in these bills do not raise a presumption that these operations have been conducted by
the German company. The question must depend solely on the evidence as to who has actually got
the operations of assembly or installation or erection made or paid for it. The material on record in
this reference is only one way, namely, that it was the Port Trust that got the Reclaimer assembled,
installed and erected at Visakhapatnam and that, in fact, the Port Trust paid Rs. 3,97,034.66 to the
workers. There is absolutely no material in favour of the Department on this question. There is no
evidence that the German company even reimbursed the expenditure of the Port Trust in this regard.
This contention is, therefore, liable to be rejected.

Mr. Bremer did not carry on any construction, installation or assembly project or the like on behalf of
the German company in India. He was only delegated to India for supervision. As already pointed
out, the work of construction, installation or assembly was actually done by the Port Trust and not by
the German engineer. It is not, therefore, permissible to equate the situation with one where the
German engineer has, instead of merely supervising the above operations, was himself in charge of
those operations on behalf of the German company.

Hence, the German company cannot be brought within clause (bb) of art. II(1) (i) by reason of any of
the submissions made on behalf of the Department.

The Poona company cannot be treated as an agent of the German company but that it is in the
position of an independent contractor dealing, at arm's length, with the German company on a
principal to principal basis. Further, clause (dd) requires that the agents shall exercise a general
authority in India to negotiate and enter into contracts on behalf of the German enterprise. There is
no material placed before us to show that the Poona company had any such general authority as
above stated. Therefore, clause (dd) (i) cannot be invoked on behalf of the Revenue.

The interest agreed to be paid along with each of the instalments of unpaid purchase money was
agreed to be part of the sale consideration itself and cannot be treated as an independent "source"
of income. The words "any other form of indebtedbess from sources" in the other territory can only
mean interest arising or accuring as a separate "source" of income. It cannot include interest payable
on the unpaid purchase money agreed to be part of the sale consideration. There is nothing in the
initial contract or any novation converting the interest payable with the instalments as a "loan".
Hence the interest specified in clause 12(a) of the contract is, in our opinion, not liable to income-tax.

Hence, the assessee is immune from liability either wholly or partly to income-tax in view of the
provisions of the Double Taxation Avoidance Agreement between the Federal Republic of Germany
and India.

New Delhi Vs Samsung Heavy Industries Co. Ltd. [DIT New Delhi Vs Samsung (Civil Appeal
No. 12183 of 2016)

FACTS: In 2006, the Oil and Natural Gas Corporation, a state-owned enterprise of the government of
India, awarded a turnkey contract to a consortium comprising of Samsung Heavy Industries
(‘Samsung’), a company incorporated in South Korea, and an Indian company.

The scope of the contract was to carry out work, inter alia, of surveys, design, engineering,
procurement, fabrication, installation and modification at existing facilities, and start-up and
commissioning of the entire facilities covered under the Vasai East Development Project.
Samsung set up a project office in Mumbai to act as a communication channel with the Oil and
Natural Gas Corporation for the project. Pre-engineering, survey, engineering, procurement, and
fabrication activities took place abroad.

Samsung ’s India income tax return declared a loss in relation to its activities carried out in India.

Assessment Officer’s findings: The assessing tax officer issued a show cause notice, alleging that
Samsung’s offshore supply and services should be taxed in India as they were attributable to a
permanent establishment in India. According to the assessing officer, the project office was involved
in the core activity of execution of the project the designing or fabrication of materials and therefore
was a permanent establishment of Samsung in India within the meaning of Article 5.1 of the India-
Korea DTAA.

Samsung argued that the offshore supply and services were not attributable to the permanent
establishment in India as the project office was acting as a mere communication channel and
therefore was used merely for preparatory and auxiliary activities which are specific exempt
activities.

However, the assessing officer alleged that the project in question was a single, indivisible “turnkey”
project which could not be split up and, therefore, the entire profit from the project should be
taxable in India and accordingly attributed 25% of the revenues allegedly earned outside India as the
profit attributable to the permanent establishment in India. The order of the assessing officer was
upheld by the Dispute Resolution Panel.

Tax Tribunal ruling: In appeal by Samsung, the tribunal relied on an application that was submitted
by Samsung to the Reserve Bank of India for the registration of the project office. The application
referred to a board resolution of the company for opening the project office in India, which stated
that “the company hereby open one project office in Mumbai, India for coordination and execution
of Vasai East Development Project”. The tribunal held that it was clear from the board resolution that
the project office was opened for coordination and execution of the project. It then held that the
project office was a fixed place of business of Samsung Heavy Industries in India.

Samsung argued that even if there was a permanent establishment, the activities of the permanent
establishment met the test of preparatory or auxiliary activities in Article 5.4. The tribunal rejected
this argument, stating that the onus of proving that the activities were preparatory or auxiliary was
on Samsung and that it brought no material on record to prove this fact.

Samsung produced the accounts of the project office to demonstrate that there was no expenditure
related to the execution of the project. Samsung also demonstrated that only two people worked in
the project office, neither of whom was qualified to perform any core activity of Samsung. The
tribunal rejected these arguments, stating that the accounts were in the hands of Samsung and that
the mere mode of maintaining the accounts alone cannot determine the character of a permanent
establishment.

The tax tribunal, however, remanded the matter back to the tax officer to reconsider the deemed
profit of 25% attributed by the tax officer to the permanent establishment. The tribunal found that
there was insufficient information on record to ascertain the extent of business activities carried on
by Samsung Heavy Industries through the project office.
High Court ruling: The Uttarakhand High Court allowed the appeal only on the question of whether
the tax officer used an arbitrary profit rate of 25% without examining whether it was attributed to
the activities of the permanent establishment. According to the High Court, neither the tax officer
nor the tribunal made any effort to bring on record any evidence to justify this figure.

Supreme Court ruling: In appeal by the tax department in the Supreme Court, the tax department
again argued that the project office was connected with Samsung’s core business.

However, Samsung reiterated that the Mumbai project office consisted of only two employees,
neither of whom had any technical qualifications to execute the project. Further, the project office
accounts demonstrated that it had not incurred any expenditure for execution of the project.

The Supreme Court relied on the board resolution enclosed with the application to the Reserve Bank
of India for the registration of the project office, which stated that the project office was established
for coordinating and executing “delivery of documents in connection with construction of offshore
platform modification of existing facilities for Oil and Natural Gas Corporation above”.

The Supreme Court stated that the findings of the tribunal were perverse to the extent of its
conclusion that the project office was involved in the core activity of execution of the project and
that merely maintaining accounts cannot determine the character of permanent establishment.

The Supreme Court thus concluded that the activities performed by the project office were of
auxiliary nature as the project office acted as a communication channel between Samsung and
ONGC. In deriving the above conclusions, the Supreme Court relied on its rulings in Morgan Stanley
& Co. Inc. and E-Funds IT Solutions, Inc., where, depending on the specific facts of the case, certain
back office and support functions were held not to give rise to a fixed place permanent
establishment.

India vs Hyatt International-Southwest Asia Ltd., December 2023, High Court of Delhi, Case
No ITA 216/2020 & CM Nos. 32643/2020 & 56179/2022

December 22, 2023 / Arm's length principle, Article 12, Article 5, Article 7, Decision predominantly in
favor of taxpayer, Fees for Technical Services (FTS), Fixed place of business, High Court, incidental to
the main services, Incidental use, India, Know-how, Permanent establishment, Permanent
Establishments, Permanent Establishments, Place Of Effective Management (POEM), Royalty, Royalty
and License Payments, Royalty and License Payments, Service agreement, Services and Fees, Services
and Fees, Strategic Oversight Services Agreements, Tax treaty interpretation, Tax Treaty
Interpretation, Tax Treaty Interpretation

A sales, marketing and management service agreement entered into in 1993 between Asian Hotels
Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate
agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel
Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian
Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In
2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a
portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India.
Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the
order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court.
Judgement of the High Court The High Court set aside in part and ...
Adobe Systems Software Ireland Ltd., ... vs Adit, New Delhi on 9 May, 2018

FACTS: Adobe Systems Software Ireland Ltd. (hereinafter referred to 'assessee') is a company
incorporated under the laws of Ireland and is engaged into the licensing and distribution of computer
software (Adobe products) outside of North America including India. Since, it is a tax resident of
Ireland, therefore, assessee has claimed beneficial treaty provision of India-Ireland DTAA. The
assessee had entered into non exclusive distribution agreements with Indian companies, namely,
Ingram Micro India Private Limited; and Redington (India) Limited, wherein they have been
appointed as distributor to distribute Adobe products in India. These products are delivered by the
assessee to the Indian Distributors 'ex-warehouse' from the warehousing facility of the assessee
outside India. For the Assessment Year 2008-09, the assessee has filed its return of income on 31st
March, 2010 declaring 'Nil' income from the consideration paid by the Indian distributors to the
assessee towards the purchase of Adobe products on the ground that the same is not taxable in India
either as business income in absence of PE or as a 'royalty' under Article 12 of the Treaty. The
arrangement and conduct between the assessee and the Indian distributor has been stated to be on
principle to principle basis. The Assessing Officer in the course of draft assessment proceedings
sought explanation from the assessee as to why the amount received by the assessee upon sale of
Adobe software to the Indian distributors should not be taxed as 'royalty'. The assessee after
explaining the nature of transaction, produced copy of agreements entered into with the Indian
distributors for the distribution of software products; and the key feature of the transaction
emanating from the said agreement.

DECISION: in view of the aforesaid discussion and binding judicial precedent of the Hon'ble
Jurisdictional High Court, we hold that the nature of payment as received by the assessee from sale
of Adobe Software products cannot be characterized as 'royalty', and therefore, the same is outside
the purview of taxation in view of India-Ireland DTAA. Since, admittedly, assessee does not have a PE
in India, therefore, such an income cannot be taxed as business income under Article 7 and further it
is also not the case of the Revenue that such a payment is to be taxed as business income.
Accordingly, the grounds raised by the assessee in grounds no.3 to 8 are allowed.

In ground no.9 assessee has challenged that the Assessing Officer has erred in law in not giving credit
of the taxes withheld by the Indian distributors. Since we have already held that the amount of
payment cannot be taxed in India, therefore, this issue has become purely academic. Similarly,
grounds no.10 and 11 have also become purely academic.

In the result, the appeal of the assessee is allowed.

Luxembourg vs “A” SARL, September 2023, Administrative Tribunal, Case No 43535

(ECLI:LU:TADM:2023

FACTS: In 2013 “A” SARL requested a tax ruling confirming that its US branch had sufficient substance
to qualify as a permanent establishment. The tax authorities issued the ruling conferming this to be
the case, but only premised on the information provided by “A” SARL. The ruling would not be valid if
the facts or circumstances described therein were incomplete or inaccurate.

In 2016, “A” SARL filed an amended tax return for 2013 in which it had effectively allocated a
dividend in kind to the US branch.
Despite of the above mentioned tax ruling, the tax authorities disallowed the amendments to the tax
return, finding that the US branch did not have sufficient substance to qualify as a permanent
establishment.

Not satisfied with the decision “A” SARL filed an appeal with the Administrative Court.

DECISION: The Court decided in favour of the tax authorities and denied the recognition of US
permanent establishment.

“In view of all the inconsistencies noted above in relation to (i) the date on which the Branch was set
up, (ii) the transfer to the Branch of the claimant company’s shareholdings in company “M” and (iii)
the distribution of the dividend to the claimant company, and in the absence of detailed and
concrete explanations from the plaintiff company concerning, in particular, the contradictions in the
dates mentioned in the various resolutions of its Board of Directors, respectively in its initial and
amending tax returns, the allegation that the disputed dividend in kind was attributed to it via the
branch must be rejected as being unsupported by any tangible evidence. Indeed, it would have been
incumbent on the plaintiff company to provide documents that would have made it possible to
establish irrevocably and indisputably that the disputed bonds had first been transferred by “M” to
the branch before being subsequently reallocated to it by the branch, such as, for example, a copy of
the decision by the shareholders of “F” to distribute a dividend in kind to the branch, with a precise
indication of the date of payment, proof of the registration of the bonds in “M”‘s share account,
proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s
share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the
bonds to “M”‘s share account and proof of the transfer of the bonds to “F”‘s share account. bonds to
the branch’s securities account, or a copy of the minutes and decisions taken by the manager of the
US Branch, and in particular a document issued by the latter stating that the … Eurobonds were
continued by the branch to the plaintiff company after July 11, 2013 at 4:30 p.m., i.e. the time when,
according to the aforementioned letter of July 11, 2013, the branch would have been allocated the
plaintiff company’s holdings in company “F”, or, if applicable, on July 12, 2013, which it nevertheless
remains in default of doing.

This conclusion is not shaken by the documents submitted by the plaintiff company to establish the
existence of a permanent establishment in the United States within the meaning of Article 5 of the
Convention, namely the certificate of registration of the Stable Establishment with the Connecticut
revenue authorities, the branch’s bank account details and the copy of the service contract between
the branch and the American company “H”. Indeed, it must be noted that the certificate of
registration of the Stable Establishment with the Connecticut Revenue Service contains no precise
date, so that it has not been established that the said establishment was actually created on July 11,
2013, as the plaintiff company maintains. As for the other two documents, they are irrelevant to the
issue of the actual transfer of the dividend in kind to the branch, and must therefore be rejected as
irrelevant in this respect. The same is true of the copy of the document described by the plaintiff
company as a “copy of the confirmation of the listing of the Eurobonds on the Jersey Stock
Exchange”, dated October 9, 2013, which, in the absence of more detailed explanations, does not
allow us to conclude that the disputed bonds were actually reallocated to the plaintiff company via
the branch on July 12, 2013.

It follows that it has not been unequivocally established that the key elements of the transaction in
the present case correspond to those described in the request for an advance ruling, so that the ACD
was not obliged to comply with it, in particular as regards the recognition of the branch as a
permanent establishment and consequently the taxation of its profits in the United States.

It follows from all the foregoing considerations that the tax office rightly refused to take into
consideration the new tax balance sheet as provided by the plaintiff company together with the
rectifying tax return dated November 15, 2016, so that the bulletins for community income tax and
communal business tax for the year 2013, issued on September 21, 2016 are to be confirmed.

It follows from all the foregoing considerations that the appeal is not well-founded in any of its pleas,
so that the plaintiff company is to be dismissed.”

MORGAN STANLEY & CO., INC DIT International Taxation, Mumbai vs. Morgan Stanley &
Co. INC (2007) 292 ITR 416
FACTS: Morgan Stanley & Co. (‘MSCo’ or ‘taxpayer’) was incorporated in the United States. It was in
the business of providing financial advisory services, corporate lending and securities underwriting
services. MSCo was wholly owned subsidiary of Morgan Stanley, US. It was an investment bank and
had a number of group companies in various parts of the world.

Morgan Stanley Advantage Services Private Limited (‘MSAS’) was incorporated and set up by the
Morgan Stanley Group in India, to support the group members’ front office functions in their global
operations. Outsourcing support services MSAS entered into an agreement with MSCo to provide
various back office/ support services which broadly covered the functions such as equity and fixed
income research, data processing, account reconciliations, IT enabled services, etc. MSAS used the
logo and brand name of Morgan Stanley.

As per the agreement, MSCo provided MSAS with customer material, including hardware, intellectual
property rights, software or data licenses, procurement and connectivity, etc. The products
developed by MSAS were exclusive property of Morgan Stanley Group. However, MSAS did not
undertake important revenue generating functions of MSCo nor did it bear any significant market risk
with respect to its transactions with MSCo.

The interaction with clients was done entirely by the employees of MSCo. Under the service
agreement, the consideration paid to MSAS by MSCo for the services rendered would be the total
cost and a mark-up of a certain percentage of the total cost. Stewardship activities MSCo, like any
other customer, had undertaken certain stewardship and similar activities.

These activities were like briefing MSAS on the standard of services expected, monitoring the overall
outsourcing operations at MSAS, acquainting the staff on various aspects of the functions by
conducting briefing sessions for effective transitioning of various functions and providing basic
guidance. However, MSCo was not involved in day-to-day management or other specific services to
or for MSAS.

This was done for ensuring that MSAS achieved the overall global value benchmarks of the Morgan
Stanley Group. Employees on Secondment / Deputation MSCo’s staff was also sent on deputation at
the request of MSAS, for periods ranging between several months to a couple of years to work under
its control and supervision.

It was agreed that the staff would continue to be employed or engaged and their salaries and fees
would be directly paid by the MSCo. MSAS reimbursed the compensation cost to the MSCo with no
profit element. The above facts are explained by way of a diagram:
ISSUES:

1. Whether MS & Co. had a PE in India under the terms of Article 5 of the DTAA? and

2. If answer to (1) is yes, then whether the payment of arm’s length remuneration by MS & Co. to
MSAS extinguishes MS & Co.s tax liability in India?

DECISION: The SC closely examined the Indian tax authorities’ contention regarding the existence of
a PE of MSCo in India, by virtue of the performance of outsourced activities by MSAS. The SC
observed that to decide whether a PE was constituted, there must be a functional and factual
analysis of each of the activities undertaken by MSAS.

The SC notably observed that under Article 5(1) of the DTAA, a PE of a multinational enterprise
would come into existence in India, only if a fixed place exists in India, through which the business of
the multinational enterprise (MSCo) was wholly or partly carried on.

Whether MSCo had a PE in India Fixed Place of business?

PE under Article 5(1) of the DTAA In terms of Article 5(1) of the DTAA there exists a fixed place PE,
when there is a fixed place through which the business of the enterprise has been carried on partly
or wholly. It can be observed that a general definition of PE in the first part of Article 5(1) postulates
the existence of fixed place of business whereas the second part of Article 5(1) postulates that the
business should be carried on through such fixed place.

The SC noted that MSAS in India was engaged in supporting the front office functions in fixed income
and equity research of MS & Co. and also in providing IT enabled services such as data processing
support, technical services, and reconciliation of accounts. Thus, it can be seen that only back office
services had been outsourced by MSCo to MSAS in India.

Further, the SC did not consider it necessary to examine the first part of Article 5(1) and directly
looked at the second limb of Article 5(1), i.e., through which the business of the multinational
enterprise (MSCo) was wholly or partly carried on.

The SC held that MSCo cannot be said to have a fixed place PE in India in terms of Article 5(1) of the
DTAA in respect of the back office operations performed by MSAS, as the condition of carrying on of
MSCo’s business through such fixed place was not satisfied.
This was based on the premise, that the back office functions carried out by MSAS, were in the
nature of preparatory and auxiliary activities, and hence, such functions were covered in the negative
list of activities as stated in Article 5(3) of the DTAA.

It can be observed that the SC had not analysed the first part of Article 5(1), i.e., whether MSCo had
a ‘fixed place’ in India, through the off-shoring of various functions to MSAS. However, the AAR in its
ruling had clearly stated that “the place of business of the MSAS is no doubt a fixed place.”

Thus, it can be presumed that the SC had examined, in detail, the nature of functions performed by
MSAS for MSCo, negating the basic rule of Article 5 (PE test), only because there was an existence of
a ‘fixed place’ of MSCo in India through MSAS. Otherwise, there would be no need for the SC to
conclude that the activities of MSAS were ‘excepted activities’ under Article 5(3)(e) of the DTAA, and
hence it was held that as regards its back office functions, MSAS would not constitute a fixed place
PE under Article 5(1) of the DTAA.

The SC had gone beyond the traditional approach and observed and analysed the business activities
conducted, that is, back office operations carried on by MSAS in India, to determine whether MSCo
had a PE in India or not. Another aspect of this decision that needs to be considered is the
consequences; if MSAS had been carrying on front office operations instead of back office operations
in India.

The SC observed that in order to decide whether a PE stood constituted, one had to undertake a
functional and factual analysis of each of the activities to be undertaken by the enterprise. The OECD
commentaries have established criteria for a PE constituting business activity of being, a “core
business activity”, as opposed to an “auxiliary or preparatory activity”.

The decisive aspect for the commentaries is whether the activity forms an essential and significant
part of the activity of the enterprise as a whole.

All business activities which contribute to the business earnings of the enterprise are core business
activities.

Some activities, although undoubtedly parts of a business activity, are considered insignificant and
are therefore specifically exempted under the modern tax treaties (the “negative list”).

The hypothesis for the proceeding discussion is that the “excepted activity test” looks both at the
qualitative aspect, i.e., the nature of the activity (“essential”), and its relative importance
(“significant”) to the whole enterprise, which is a quantitative aspect. Core business activities are
those which increase the value of the enterprise, either as a going concern, or based on the asset
value.

In the present case, the SC held that back-office operations of MSAS were preparatory and auxiliary
in nature which falls under Article 5(3)(e) and therefore, the same would not give rise to a fixed place
PE.

In contrast, the front office operations forms an essential and significant part of the activity of the
enterprise as a whole which contribute to the business earnings of the enterprise and therefore, the
same may be regarded as core business activities. If MSCo had outsourced some of its main business
functions to MSAS which are substantive business functions and cannot be termed as mere auxiliary
and ancillary business functions, then in such a case it could constitute core business functions falling
under the ambit of Article 5(1) of the DTAA, in terms of the SC ruling, and this could lead to the
determination of a PE. However, the SC had given great importance to the factual and functional
matrix, to determine a PE.

Thus, it was this matrix which would be the determinant factor, and due to various nuances
prevalent in the dynamic nature of the off-shoring business, it would be necessary to strike a note of
caution, that it would be premature to cloak all such arrangements with the same hue, as there
could be essential differing economic parameters which would have a great bearing, for example,
third party service providers, etc.

Further, it also needs consideration that the inherent nature of the offshoring business, needs the
link with the parent organisation for the business to survive. Hence, the operational model of the
whole industry would be under risk, which would never be in the interests of the economy of such
countries, that is, the service exporting nations. Thus, a balanced approach based on the analysis of
the said factual matrix, coupled with anin-depth transfer pricing analysis is critical.

The said approach would capture the real economic value contributed to the income earning
capacity of the service recipient, by the service provider. This could be the basis to attribute
equitably a fair compensation for the service exporting countries, and a just methodology, wherein
each state would be able to collect its rightful share of taxes, and thus, could be the way forward.

Hence, according to the SC, MSCo was not carrying out any business activity in India. MSAS was
rendering back office operations in India and such functions were considered as ‘preparatory and
auxiliary’ in nature within the meaning of Article 5(3)(e) of the DTAA. Hence, no fixed place of
business was constituted under Article 5(1) of the DTAA.

Agency PE under Article 5(4) of the DTAA

The SC further observed that MSAS had no authority to enter into or conclude contracts on behalf of
MSCo and the contracts would be concluded only in US. The implementation of the contracts only to
the extent of back office functions would be carried out in India and therefore, MSAS would not
constitute an agency PE in India under Article 5(4) of the DTAA.

Service PE under Article 5(2)(l) of the DTAA In the instant case, two activities were performed by
employees of MSCo in India, i.e., stewardship activities and the work performed by the employees
on deputation in India.

There is no definition of stewardship activities given either in domestic tax law or DTAA except in the
Transfer Pricing and Multinational Enterprises Report, 1979 (“1979 Report”). As per 1979 Report,
stewardship activities cover a range of activities by a shareholder that may include the provision of
services to other group members, for example services that would be provided by a co-ordinating
centre.

The stewardship activities involved briefing of the MSAS staff to ensure that the output meets the
requirements of MSCo. These activities included monitoring of the outsourcing operations at MSAS.
The stewardship activities are rendered in order to protect the interest of the customers. A customer
is entitled to protect its interest both in terms of confidentiality and in terms of quality control. Since,
MSCo had worldwide operations; it was entitled to insist on quality control and confidentiality from
the service provider.

The stewards were neither involved in day to day management nor any specific services undertaken
by the service provider. In such a case, it could not be said that MSCo had been rendering services to
MSAS. Accordingly, the SC held that stewardship activities would not fall under Article 5(2)(l) of the
DTAA and could not constitute a Service PE.

Hence, on this aspect, the SC deferred with AAR’s decision and held in favour of MSCo. Under Article
5(2)(l) of the DTAA, even a single day in which services are provided by employees of a non-resident
enterprise to a related enterprise through a fixed place in India can constitute a PE. The SC observed
that an employee of MSCo, when deputed to MSAS, does not become an employee of MSAS.

The deputed employee had a lien on his employment with MSCo and as long as the lien remains with
MSCo, the company may be considered to retain control over the deputed employee’s terms and
employment.

Thus, the deputed person cannot be considered as an employee of MSAS. The SC then found that
when the activities of a multinational enterprise entail it being responsible for the work of deputed
employees and the employees continue to be on the payroll of “the multinational enterprise or they
continue to have their lien on their jobs with the multinational enterprise”, a service PE can emerge.

Further, the SC appears to have taken into consideration that the request/requisition for the
deputation of employees with specialised skills, generally comes from MSAS. Furthermore, MSCo
retains a degree of control and supervision over the employees to the extent they remain on MSCo’s
payroll, and any disciplinary action against them may not be taken by MSAS without consultation
with MSCo. The services were not for MSCo, but for and to MSAS. Since, the deputed employees
remain employees of MSCo, and provide services to and for MSAS, a service PE is created under the
terms of Article 5(2)(l) of the DTAA.

Attribution of Profits to a PE and Transfer Pricing

Article 7 of the OECD Model Convention and the UN Model state that a foreign enterprise is liable to
tax in the source country on its business profits to the extent the profits are attributable to the PE in
the source country. This provision specifies how such business profits should be ascertained, and
states that a PE is to be treated as if it is an independent enterprise (profit centre) apart from the
head office and which deals with the head office at arm’s length.

Article 7(2) of the UN Model advocates the arm’s length approach for attribution of profits to a PE.
Under Article 7(2), economic nexus is an important issue on the principle of profit attribution to a PE.
Therefore, in the current case, the SC held that only the profits of MSCo that had an economic nexus
with the PE in India was taxable in India.

The SC held that because the remuneration to MSAS was justified by a transfer pricing analysis, no
further income could be attributed to the PE, i.e., where an associated enterprise that also
constitutes a PE (in this case, MSAS) is remunerated on an arm’s length basis, taking into account all
the risk-taking functions of the enterprise (PE), no further profit was attributable to the PE. However,
where the transfer pricing analysis did not adequately reflect the functions performed and the risks
borne by the enterprise, it would be necessary to further attribute profits to the PE for those
functions/ risks that had not been considered.

This determination would depend on the functional and factual analysis undertaken in each case. It
was further held that the TNMM was the most appropriate method for determination of the arm’s
length consideration of the transactions between MSCo and MSAS. The above indicates that the tax
liability of a non-resident entity is extinguished if an associated enterprise (that also constitutes a PE)
is remunerated on an arm’s length basis, taking into account all the risk-taking functions of the
enterprise (PE).
As such, this decision will apply only in those cases where the PE is also constituted by the
functioning of the associated enterprise and the associated enterprise is remunerated on an arm’s
length basis after taking into account all the risk-taking functions of the PE, i.e., the functions
performed and risks borne by the PE are appropriately captured by the associated enterprise.
Further, it seems that the SC had adopted an approach that was almost similar to the single-taxpayer
approach for the attribution of profits which was in contrast to the authorised approach of the OECD;
indeed the judgment leaves room for further profits to be attributed to a PE if the factual and
functional analysis of the associated entity does not fully capture the functionality of the PE.

The OECD Report on the Attribution of Profits to a permanent establishment provides that, for tax
purposes, in the source country there are two taxpayers, namely the dependent agent (resident) and
the dependent agent PE (non-resident). The functions carried out and the risks borne by these two
are to be considered and compensated separately. In the source country, two separate tax returns
must be filed, one for the dependent agent (resident) and one for the non-resident (PE).

The OECD Report also suggests that the source country could have the right to tax the dependent
agent PE even where the dependent agent has been compensated by an arm’s length consideration.
It seems clear that the Supreme Court dissented from the view expressed by the OECD Report that,
the payment of arm’s length remuneration does not necessarily extinguish the tax liability of the
non-resident in the host country. However, an analysis of the decision of the Supreme Court reveals
that the concession was granted with a caveat, that the associated enterprise should completely
“capture the factual and functional analysis of the PE”; then and only then, the concession of the
decision will apply.

Formula One World Championship Limited vs. CIT, International Taxation – 3 Delhi (2017)
394 ITR 80
FACT: Formula One Group and various Agreements Federation Internationale de I’Automobile (FIA), a
non-profit association, was established as the International Association of Recognized Automobile
Clubs to represent the interests of motoring organizations and motor car users globally.

FIA was a regulatory body; it regulated the FIA Formula One World Championship (Championship).
Formula One World Championship Limited (FOWC or taxpayer) was a company incorporated in UK on
7th March 2001 and a tax resident of UK. FIA had assigned commercial rights in favour of Formula
One Asset Management Limited (FOAM) vide agreement dated 24th April 2001, making FOAM the
exclusive Commercial rights holder (CRH).

On the same day, another agreement was signed between FOAM and FOWC vide which all these
commercial rights were licensed to FOWC for 100 years with effect from 1st January 2011. Formula
One (F-1) refers to the rules and regulations that define the characteristics of the race, as opposed to
any other form of motor race.

About 12 to 15 teams typically compete in these Championships in any one annual racing season.
The teams assemble and construct their vehicles, which comply with defined technical specifications,
and engage drivers who can successfully manoeuvre the F-1 cars in the racing events. All
participating teams, known as ‘Constructors’, entered into a ‘Concorde Agreement’, with FOWC and
the FIA in 2009. All the participating team bind themselves to an unequivocal negative covenant with
FOWC that they would not participate in any other similar motor racing event nor would they
promote in any manner any other rival event.
Further, as per the Concorde Agreement, FOWC could exploit the commercial rights directly or only
through its affiliates. FOWC also signed the agreement with Jaypee Sports International Limited
(Jaypee) on 25th October 2007 whereby only promotion rights were granted for the event to Jaypee,
for which Jaypee constructed the Buddh International Circuit (Circuit).

On 13th September 2011, the said agreement was replaced with the Race Promotion Contract (RPC),
which granted Jaypee the right to host, stage and promote the event for a consideration of US$ 40
million, for a period of 5 years and which was extendable for another period of 5 years. In the event
of termination of RPC, FOWC would be entitled to two years payment of the assured consideration of
US$ 40 million. Artworks Licence Agreement as contemplated in RPC was also entered between
FOWC and Jaypee on the same day, permitting the use of certain marks and intellectual property
belonging to FOWC for a consideration of US$ 1 million.

Further, on the same day i.e., 13th September 2011, the rights given to Jaypee were transferred back
to FOWC’s affiliates as a condition precedent to RPC, which were as follows:

i. Media and Title Sponsorship Rights to Beta Prema 2 Ltd. (Beta Prema 2);
ii. Paddock rights (rights to sell the tickets) to All Sports Management SA (All Sports) and
iii. Rights to generate television feed to Formula One Management Ltd. (FOM).

On 20th January 2011, Organisation Agreement (OA) was signed between FIA/Federation of Motors
Sports Clubs of India (‘FMSCI’) and Jaypee, wherein Jaypee was to organise the event. Also, Title
Sponsorship Agreement was signed on 16th August 2011 between Beta Prema 2 and Bharti Airtel,
wherein Beta Prema 2 transferred title sponsorship rights to Bharti Airtel for US$ 8 million. Facts of
the case are summarised below by way of a diagram:
After entering into the aforesaid arrangements, both FOWC and Jaypee approached Authority for
Advance Ruling (AAR) seeking its advance ruling on two main questions i.e. :

i. Whether the consideration receivable towards granting of commercial rights to Jaypee

was in the nature of royalty as defined in Article 13 of the India-UK Double Taxation
Avoidance Agreement (DTAA)? And
ii. Whether FOWC was having any ‘PE’ in India in terms of Article 5 of DTAA?

In reply to the above questions, the AAR held as follows;

i. The consideration receivable in terms of agreement was in the nature of royalty and not
business income and
ii. FOWC had no PE in India in terms of Article 5 of the DTAA, as it had no fixed place of
business in India, i.e., it neither carried out any business activity in India nor did it
authorise any entity to conclude contracts on its behalf.

Delhi High Court: Aggrieved by the ruling of AAR; FOWC, Jaypee and the Revenue authorities filed a
writ petition before the Delhi High Court (HC) under Article 226 of the Constitution of India. The HC
while deciding the writ petitions held that FOWC had a fixed place PE in India and thus, consideration
received / receivable from Japyee was chargeable to tax as business income and not royalty income.
However, the HC did not accept the plea of the Revenue that FOWC had a dependent agency PE in
India.

Aggrieved by the decision of the HC, all three parties filed an appeal before the Hon’ble Supreme
Court (SC).

ISSUES:

1. Whether FOWC had a PE in India in terms of Article 5 of the DTAA, that is,

i. Whether the Buddh International Circuit was put at the disposal of FOWC?

ii. Whether FOWC carried on any business and commercial activity in India or not?

2. Whether Jaypee was bound to make appropriate deduction from the amount paid u/s. 195 of the
Act?

DECISION: In order to determine the existence of a PE in India, the SC examined the provisions of
section 9 of the Act, which states that a foreign company may be taxed in India on an income which
accrues or arises in India (directly or indirectly) through or from any business connection in India. The
SC had also examined the term ‘business connection’ as defined in Explanation 2 to section 9(1)(i) of
the Act, and the term ‘PE’ as defined in Article 5 of the DTAA.

The SC stated that if a non-resident had a PE in India in terms of Article 5 of the DTAA, then business
connection in India stands established as per section 9(1)(i) of the Act. The SC, for the purpose of
determining whether there exists a PE in India or not in the facts of the present case, relied heavily
on:

• A Manual on the OECD Model Tax Convention on Income and on Capital by Philip Baker Q.C.
(Philip Baker),
• Klaus Vogel on Double Taxation Conventions (Klaus Vogel),
• Condensed version on Model Tax Convention on Income and on Capital by OECD (OECD
Commentary), and
 • Indian (and a few foreign) judicial decisions.

Philip Baker: Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model:

First, an establishment which is part of the same enterprise under common ownership and control,
that is, an office, branch, etc., to which he gives his own description as an ‘associated PE’.

The second type is an agent, though legally separate from the enterprise, nevertheless who is
dependent on the enterprise to the point of forming a PE. Such PE is given the nomenclature of
‘unassociated PE’.

In the first type of PE, primary requirement is that there must be a fixed place of business through
which the business of an enterprise is wholly or partly carried on. Thus, it entails two requirements
which need to be fulfilled:

• There must be a business of an enterprise of a Contracting State (FOWC in the instant case);
and
• PE must be a fixed place of business, i.e., a place which is at the disposal of the enterprise.

Further, as per Philip Baker, it is universally accepted that for ascertaining whether there is a fixed
place of business or not, PE must possess three characteristics, that is, stability, productivity and
dependence.

Philip Baker also quoted the following passage from the judgment of the Andhra Pradesh High Court
in Visakhapatnam Port Trust case, to explain the concept of PE:

“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.”

From the various examples as stated in his commentary, it was observed by the SC that in order to
ascertain as to whether an establishment had a fixed place of business or not, the physically located
premises had to be ‘at the disposal’ of the enterprise. It would be irrelevant whether the premises
were owned or rented by the enterprise, and the place would be treated as ‘at the disposal’ of the
enterprise, only when the enterprise had right to use the said place and had control thereupon.

Klaus Vogel: According to Vogel, the term ‘business’ is broad, vague and of little relevance for the PE
definition. The crucial element is the term ‘place’. For this purpose, the SC had critically examined the
definition of the term ‘place’ as stated by Vogel.

The SC observed that Vogel had also emphasised that the place of business qualifies only if the place
is ‘at the disposal’ of the enterprise, when one takes cue from the word ‘through’ in the Article 5.
According to him, the enterprise will be unable to use the place of business as an instrument for
carrying on its business, unless it controls the place of business to a considerable extent.

OECD commentary OECD commentary on Model Tax Convention mentions that a general definition
of the term ‘PE’ brings out its essential characteristics, i.e.

• a distinct ‘situs,
• a ‘fixed place of business’.

The definition, therefore, contains the following conditions:

 • the existence of a ‘place of business’, i.e., a facility such as premises or, in certain instances,
machinery of equipment, and such place of business must be ‘fixed’, i.e., it must be
established at a distinct place with a certain degree of permanence;
• the carrying on of the business of the enterprise through this fixed place of business.

OECD commentary also states that the words ‘through which’ must be given a wide meaning, so as
to apply to any situation, where business activities are carried on at a particular location, which is at
the disposal of the enterprise for that purpose.

ISSUE

1. Whether FOWC had a PE in India in terms of Article 5 of the DTAA, i.e., i. Whether Buddh
International Circuit was put at the disposal of FOWC?

DECISION: The SC had placed more reliance on crucial parameters and agreements, namely, the
manner in which commercial rights, which were held by FOWC and its affiliates, have been exploited
in the instant case. For this purpose, the entire arrangement between FOWC and its associates on
the one hand and Jaypee on the other hand, needs to be considered, to bring out the real economic
substance of the transaction between the parties. The SC while evaluating the various agreements
and arrangements, made critical observations, which clearly captured the substance of the said
transactions, they are as follows:

• Commercial rights as allegedly given to Jaypee were transferred back to the taxpayer’s
affiliates viz. Beta Prema 2, All Sports and FOM, as stated in the above facts.
• Beta Prema 2, though, was given media rights, etc., on September 13, 2011, it had entered
into ‘Title Sponsorship Agreement’ with Bharti Airtel on August 16, 2011 (i.e., more than a
month before getting the rights from Jaypee) whereby it transferred the said rights to Bharti
Airtel for a consideration of US$ 8 million.

The SC disregarded taxpayer’s argument that the racing event did not constitute a PE because the
duration of the event was only three days. The SC held that the HC had rightly concluded that having
regard to the duration of the event, even though it was for limited days, FOWC had full and exclusive
access through its personnel to the circuit for the entire duration of the event; thus, number of days
for which the access was there would not make any difference, in coming to the conclusion that
FOWC had the circuit to its disposal.

The SC disregarded taxpayer’s argument that the racing event did not constitute a PE because the
duration of the event was only three days. The SC held that the HC had rightly concluded that having
regard to the duration of the event, even though it was for limited days, FOWC had full and exclusive
access through its personnel to the circuit for the entire duration of the event; thus, number of days
for which the access was there would not make any difference, in coming to the conclusion that
FOWC had the circuit to its disposal.

The SC for coming to the aforesaid conclusion, referred to the reasoning given by the High Court
which in turn depended on the OECD commentary and Klaus Vogel’s commentary on PE, e.g.:

• A stand at a trade fair, occupied regularly for three weeks a year, through which an
enterprise obtained contracts for a significant part of its annual sales, was held to constitute
a PE.
• Likewise, a temporary restaurant operated in a mirror tent at a Dutch flower show for a
period of seven months was held to constitute a PE.
ISSUE: Whether FOWC carried on any business and commercial activity in India or not?

DECISION: The SC observed that the substantial part of this aspect had already been discussed in the
first question. It was also observed that FOWC was the Commercial Right Holder and these rights can
be exploited with the conduct of F-1 Championship, which is organised in various countries. The SC
also observed that in order to organise the event, FOWC would require track, teams to participate in
competition, public/viewers, etc. Further, for augmenting the earnings in these events, there would
be advertisements, media rights, etc. as well and it was FOWC and its affiliates which had been
responsible for all the aforesaid activities. All possible commercial rights, including advertisement,
media rights, etc. and even right to sell paddock seats, were assumed by FOWC and its associates.

The SC concluded that the taxpayer had carried on business in India under Article 5(1) of the DTAA,
i.e., dealing with determination of a fixed place PE, and concurring with the view of the HC, wherein
the HC held that:

The test laid down in Visakhapatnam Port Trust case (supra) stands fully satisfied, i.e., the Buddh
International Circuit is a fixed place where the commercial/economic activity of conducting F-1
Championship was carried out, and one could also clearly discern that it was a virtual projection of
the foreign enterprise, namely, Formula One (i.e., FOWC) on the soil of this country (India).

The SC also observed that all three characteristics of a fixed place PE i.e., stability, productivity and
dependence were present in this case. The SC held that: “Fixed place of business in the form of
physical location, i.e., Buddh International Circuit, was at the disposal of FOWC through which it
conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that
taxable event has taken place in India and non-resident FOWC is liable to pay tax in India on the
income it has earned on this soil.”

ISSUE: Whether Jaypee was bound to make appropriate deduction from the amount paid u/s. 195
of the Act?

DECISION: On this incidental issue, SC has held that Jaypee was bound to make appropriate
deductions from the amount paid u/s. 195 of the Act. However, only that portion of the income of
FOWC, which is attributable to the said PE, would be treated as business income of FOWC and only
on that part of the income, deduction was required to be made u/s. 195 of the Act.