Permanent establishment determined by contracts

By Sumes Dewan and Shradha Puri, KR Chawla & Co

The Income Tax Appellate Tribunal (ITAT) recently decided that the starting date of the six-month threshold limit to establish the existence of a permanent establishment (PE) in India would vary from case to case.

In a judgment passed by the ITAT in Jt DIT (IT) v Krupp Uhde GmbH, the tribunal said the date of the commencement of the threshold limit of six months under article 5(2)(i) of the double tax avoidance agreement (DTAA) between India and Germany to determine the existence of a PE would depend upon the facts of each case, and the terms of each contract.

Sumes Dewan Partner KR Chawla & Co
Sumes Dewan
KR Chawla & Co

Krupp Uhde, a German company, entered into various contracts with different parties to pursue a number of independent projects in India. The key issues deliberated in this case were, (a) whether the various sites could be considered together while computing the minimum period of six months as prescribed in article 5(2)(i) of the DTAA; and (b) whether the minimum six-month period could begin from the date when the project commenced.

The tax department contended that various sites together could be considered while computing the minimum period of six months and that the starting date of the project could be considered as the date of commencement for the PE. However, Krupp Uhde maintained that it was concerned only with supervisory activity and therefore the date of the PE’s commencement would be when the supervision began.

In response to the first issue, the ITAT drew attention to the various treaties India had entered into with other nations, which specified that different sites, projects or activities could be taken together to determine the minimum six-month period. Article 5(2)(i) of the DTAA specifies that the term “permanent establishment” means a fixed place of business and includes a building site, construction, installation, assembly project, or supervisory activities in connection therewith, where such sites, projects or activities continue for a period exceeding six months.

Article 5 of the DTAA, however, does not include the words “together with other such sites, projects or activities”, as specified in other tax treaties. Accordingly, it was agreed that in the case of Krupp Uhde, other sites could not be taken together to ascertain the scope of the PE.

Shradha Puri Associate KR Chawla & Co
Shradha Puri
KR Chawla & Co

The ITAT stated that because Krupp Uhde had entered into various agreements with different parties with respect to several independent projects in India, the different sites together could not be taken while computing the minimum six-month period. This also applies in other cases where separate contracts have no effective interconnection with one another.

Addressing the second issue, the ITAT maintained that different contracts may be awarded to numerous independent parties for the completion of a range of individual projects. Such work includes the construction of a building, the supply and installation of plants and machinery, the commissioning of a plant and supervision work in connection with this work.

The ITAT held that a project may begin, for instance, in May 1993 with the construction of building, which may be computed in June 1994.

Thereafter, the installation of plant and machinery may take another two years and the work could be officially commissioned in August 1996. If a person is given a supervisory role to commission a project which may commence in August 1996, the supervisory work in connection with the commissioning of the project may only take three months.

In such a case, the ITAT said it could not be argued that the supervisor alone had a PE in India on the basis that the minimum six-month period commenced from 1993.

The ITAT further stated that a period not connected with the contract could not be taken into consideration while determining the minimum six-month duration. However, in the case where one contract involves various activities which are dependent on each other, the minimum period may commence from the date at which the first activity had begun.

The ITAT stated that the six-month period could be counted from the starting date of a project only in cases where there is one single indivisible contract for various activities undertaken by a non-resident. Thus, it was decided that if the supervisory activity was carried out under a separate and independent contract, then the minimum six-month period would begin only when the activity itself had commenced, and not from the date of the project.

It was established that Krupp Uhde did not have a PE in India, as it was carrying out its business activities under a separate and independent contract for a minimum period not exceeding six months.

Sumes Dewan is a partner and Shradha Puri is a senior associate at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai, Bangalore and San Francisco as well as a representative office in Singapore.


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