September 26, 2022
  • September 26, 2022

Tax court ruling on permanent establishment of services in India

By on December 2, 2021 0

Delhi Income Tax Appeals Tribunal (Tribunal) in the case of Telenor ASA (taxpayer) confirmed that the Service Order Forms (SOF) for several service activities such as procurement, marketing, IT services (ITeS), networks, are interconnected projects and that no single activity is may result in the performance of the services for the recipient.

As a result, based on the consolidated duration of time spent by employees engaged in performing these SOF services, this resulted in the establishment of a permanent service establishment (PE) under section 5, paragraph 2, point l), of the India-Norway tax convention (tax convention) since it has exceeded the threshold prescribed by these provisions.


The taxpayer is a Norwegian tax resident who has entered into a business services agreement (arrangement) with an Indian entity to provide services under SOF. SOFs consist of separate projects / activities involving multiple departments such as human resources, marketing activities and procurement activities, undertaken by different departments through the employees of the taxpayer in India.

The taxpayer recognized the payments for these SOFs as fees for technical services (FTS) and taxed them on a gross basis of 10%, in application of Article 13 (2) of the tax treaty.

The taxpayer, simply because SOFs were governed by standard terms and conditions, did not consider the agreement to be “effectively linked” to a pre-existing PE. He treated them as separate and independent projects to prevent a service MOU in India in the absence of any staff visit to India prior to the start of the project.

The tax (revenue) authorities argued that the time spent by the taxpayer’s employees in India providing such services to the Indian company exceeded the allowed threshold, thus constituting a service PE in India under the provisions of the Article 5 (2) (l). of the tax treaty. Revenues viewed the term ‘service PE’ as an inclusive definition of services that mandate the services, including similar or similar consulting services considered to be connected projects, where SOFs are an integral part of the agreement. .

Accordingly, the revenues calculated this taxpayer’s income as a profit attributable to a service PE resulting from the service charge received from the Indian company. The Dispute Resolution Committee (DRP) confirmed the assessment officer’s order.

Tribunal decision

PE service

The Tribunal noted that the activities had been initiated within the framework of the preparation, execution and negotiation of a global mobile communications system (GSM), to design the development of a strategy, the preparation of IT solutions, benchmarking, recruitment of workforce for implementation and team training related to the GSM role for customers.

The Tribunal also concluded that SOFs carrying out multiple activities such as supply, marketing, ITeS, network, projects, etc., in chronological order of activities, are of a similar nature and constitute a set activities envisaging a set of services.

The Tribunal found that the arrangement was unified in nature and that none of the terms or clauses reflected that it was a multiple contractual arrangement. Furthermore, after examining the arrangement and the consolidated invoices issued, despite the multiple SOFs under which the services were rendered, the Tribunal concluded that the SOFs indicated that the services rendered were in accordance with a single arrangement between the Indian company. and the taxpayer.

The consolidated billing by the taxpayer followed by the total amount received also claimed that this was a single contract arrangement.

The Tribunal observed that the taxpayer’s activities towards SOF services were sequentially linked and interconnected with the FTS. There was a clear commercial coherence in the services and a link between these activities, as no SOF activity individually served a purpose in isolation. Implementation and training services were carried out through multiple SOFs and were different facets of a single homogeneous function that were effectively integrated, as the output of one SOF becomes the input of the other SOF.

The concept of “project” as defined in Article 5 (2) (l), read with the comments of the Organization for Economic Co-operation and Development (OECD), recognizes the term “same” or “related projects” for a service establishment that consists of a bunch of services interconnected and intertwined with the underlying theme of project completion, forcing the aggregation of time spent by employees to arrive at the threshold period of 183 days.

Therefore, in light of the unified arrangement, the time spent by employees and the consolidated billing model, and regarding the activities as being interdependent, the Tribunal concluded that the taxpayer was a service PE in India, aggregating the period of service to determine the “duration test” under Article 5 (2) (I) of the tax treaty.

Allocation of profits

The Tribunal agreed with the taxpayer’s contention that extraterritorial income from service activities in Norway could not be arbitrarily attributed to PE in India. Therefore, the Tribunal disregarded the calculation of the profits attributable to a PE which made an ad hoc rejection of the income received by the taxpayer in India and Norway, allowing only proportional income as an expense.

Accordingly, the Tribunal returned the matter to revenue to determine the correct share of the profits attributable to tax resulting from these related services rendered by the taxpayer in India and Norway.

Key points to remember

The Tribunal sets out an essential principle “for the same project or a related project” to determine a service ES, in order to provide guidance to taxpayers to avoid situations of splitting projects or contracts into different parts that may prevent compliance with the prescribed time threshold within the framework of the service. PE clause.

Importantly, determining whether the projects are connected would be based on the following factors, which would include whether:

  • the projects are covered by a single framework contract;
  • the projects would have been covered by a single contract in the absence of tax planning considerations;
  • contracts covering the different projects have been concluded with the same person or related persons;
  • the conclusion of additional contracts with a person is the logical consequence of a previous contract concluded with that person or related persons;
  • the nature of the services provided under the different projects is the same or similar; and
  • the same people hired by the company perform the services within the framework of the different projects.

Therefore, to avoid any possibility of abuse, the conditions set out in the 2017 OECD Commentary read with Article 5 should be looked at from two angles, namely the entities providing the services and the customer. If the activities are part of the same project or a related project from the point of view of the company or the client within the prescribed period, Article 5 (3) (b) in the framework of a ES of service may apply.

The provision applies if the activities are part of the same project or a similar related project only from the client’s point of view, even if these activities are not part of the same project or a related project from the point of view of the client. the foreign company performing the services.

It is important to note that one can trust the Sumitomo Company and Valentin Maritime case, where by applying the ratio of such decisions, it emerges that the test of 183 days being the deadline threshold applies to each project commercially and geographically.

However, the only situation that triggers the aggregation principle is when the activities are inextricably linked or interwoven with the main project to be considered in a coherent way as a whole. Essentially, unconnected or independent projects should not be grouped together and considered on their own, even though different contracts may have been entered into by the same client.

The concept was also reiterated in the case of Kreuz Subsea Pte to conclude that various contracts in India concluded separately do not constitute a PE in India under Article 5 (3) where the time limit of 183 days for each project is much less.

It should be noted that some Indian tax treaties, such as those with Australia, Austria, Belgium, Bulgaria, Canada, China, Denmark, Italy, New Zealand, Spain, Turkey and the United States, including Norway, provide for the aggregation of days to calculate the threshold period. However, the principle cannot be applied to tax treaties which do not specifically require aggregation.

In fact, in the present case, the General Court collectively tested the time spent by the employees to determine the threshold of services rendered to trigger a PE service within the meaning of Article 5 (2) (l) of the taxpayer’s tax treaty. in India .

The PE service introduced in the United Nations Model Tax Convention in 1980 never envisioned that e-commerce businesses or services impose a tax that does not require a physical presence in the source country. However, as technology advances, the concept of fixed base or physical services evolves with digital business practices; and countries such as India, Saudi Arabia and South Africa are preparing to impose a tax on virtual services through the constitution of a service MOU which would require a thorough evaluation of contracts and activities by the company. business to mitigate tax risk.

In the recommendations of the OECD BEPS Action Plan 7 – Prevention of artificial avoidance of permanent establishment status – Article 14 of the Multilateral Instrument (MI) includes “supervisory activities” and ” consultancy services’ undertaken in the course of specified activities, including construction or installation. on construction sites, for the determination of a PE.

This is because when a permanent establishment undertakes specified activities in India for one or more periods of time and its related activities are undertaken at the same site or project or at another specified location by closely related companies, this should be taken. taken into account in determining the duration of the presence of a foreign company in India.

Interestingly, Section 14 of the India-Norway IAM Synthesized Version regarding Covered Tax Agreements specifically excludes consultancy services to apply the concept of aggregation to interpret a service SE.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Shailendra Sharma is a Chartered Accountant associated with a multinational financial services company, India.