Foreign firms can be taxed only if PE in India is involved

It especially includes a place of management, branch, factory, office, workshop, etc. However, what shall constitute a PE is a question of fact despite the definition given under the DTAA, which is an inclusive one. Thus, in certain cases, the facts of the case determine whether a particular activity carried out by the assessee constitutes a PE.

Its significance lies in that "business profits" of a foreign enterprise can be taxed in India only if it has a PE in India and the profits are attributable to the PE. Even the amount for "royalty" and "fees for technical services" (FTS) received by foreign enterprises will be taxed as business profits if they are attributable to a PE in India.

Various judgments have been given by tax authorities in order to decide whether a project office involving construction, installation and assembly etc. would constitute a PE or not. It is also a matter of debate whether supervisory activities constitute a PE or not. In this context, following two issues need special attention:

Whether supervisory activities by themselves constitute PE.

Whether in order to constitute PE, it is necessary that the fixed place of business should be that of the assessee himself.

The recent case Steel Authority of India Limited vs ACIT (301 ITR 235) is relevant, wherein it has been held if the assessee provides supervisory services for installation for more than six months, such supervisory activities by themselves constitute a PE, even if the installation or assembly project does not belong to the assessee.

In the above case, SAIL entered a contract with a German company, in pursuance of which the company provided technical supervision services for erection of machinery by Indian contractors at the factory sites of SAIL. The company had rendered such services for more than six months at the installation site of SAIL in India.

The company contended that the payment was in the nature of "fees for technical services" and hence liable for a deduction of tax at the rate of 10 per cent. However, the Assessing Officer (AO) observed the assessee having rendered services for more than six months, it constituted a PE.

Also, though the payment to the assessee was in respect of rendering of technical services, the income was taxable as "business profits" because the company had a PE in India and the income is attributable to that PE.

The Hon'ble ITAT held that "though the installation project did not belong to the assessee, it was a fact that it had been providing supervisory services for installation purposes for more than six months and these supervisory activities constituted the assessee's PE. Thus, Article 12(5) of the DTAA was applicable and the computation of profits had to be as provided under Article 7 of the DTAA."

To avoid formation of PE in India, foreign enterprises are advised to restrict the time-frame of their installation/supervision activities to the period prescribed in various DTAAs.

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