H P Agrawal: Permanent firm through staff

Foreign enterprises having a business tie-up in India often depute some employees or representatives to look after and protect their business interest. Some times the foreign employees are deputed to help in running of the Indian business.

In a case where the foreign employee is placed on the rolls of the Indian company, the foreign enterprise cannot be held to have a permanent establishment in India through an employee.

But a difficulty can arise in a case where the foreign employee remains on the rolls of the foreign company. In such cases a view can be taken that the foreign company will be deemed to have a permanent establishment in India through the employee.

In this connection, reference may be made to a case reported in 242 ITR 208. In this case, an Indian company and a company incorporated in the US formed a joint venture company in India called AB.

The business of the US company was to provide management and consulting services to subsidiaries or affiliated companies.

Accordingly, the Indian joint venture company AB entered into a management provision contract with the US company, which offered managerial services for the establishment, development and operation of its business in the manufacture and sale of cars under the joint venture agreement. The US firm was to receive an annual fee from the Indian company for providing the management services.

The US firm applied to the Authority for Advance Rulings to give a ruling whether any part of the amount paid by AB to the US company in terms of the management provision agreement was liable to tax in India.

The Authority observed that the responsibility of the US company was much more than that of mere employment agency. The personnel nominated by US firm continued to be on its own pay-roll. They were paid by the US firm.

In fact, the US company was being paid for the services rendered by it to AB through its employees. Therefore, the Authority held that under Article 5 of the AADT between India and the US, the US firm would be considered to have a "permanent establishment" in India.

Where, however, the foreign company acts only as an advisory or employment agency the activity of supplying employees will not create a permanent establishment, although consideration received by a foreign enterprise for supplying skilled labour (or other type of employees) will be chargeable to tax in India as "fees for technical services" (See 222 ITR 551).

There is yet another provision in the tax treaties to which reference is necessary. The tax treaties generally contain a provision that if a foreign enterprise is involved in construction of a building site, or in construction, assembly or installation project or supervisory activities in connection there with, the foreign company will be deemed to have a permanent establishment in India provided the activities in India continue for a minimum specified period as contained in the relevant tax treaty.

An analysis of all these provisions shows that to avoid creation of permanent establishment, deputation of employees should be done in such a manner that the employees are taken directly on the rolls of the Indian company.

This general rule can be deviated where the employees are deputed for short duration of less than six months or so. Otherwise the foreign enterprise will run the risk of creating a permanent establishment in India through deputation of the employee.

agar@nda.vsnl.net.in