SERVICE PE-
Critical Observations on Judgement in Centrica Offshore India (P) Ltd.
Facts:-
1.
Centrica Plc, a company incorporated in UK,
along with foreign subsidiaries in Canada, collectively referred to as
“Overseas Entities” were engaged in the business of supplying gas and
electricity to consumers across UK and Canada.
2.
The overseas entities outsource their back
office support function (Debt collection/consumers billing/monthly jobs) to
third party vendors in India.
3.
To ensure that Indian vendors comply with
quality guidelines, Centrica Indian Offshore (P) Ltd (CIOP), as subsidiary of
Centrica Plc. was established to provide locally based interface between
overseas entities and Indian Vendors.
4.
To seek support during initial years, CIOP
sought some employees from overseas entities (From UK and Canada) on secondment
for some duration.
5.
Employees so seconded worked under direct
control and supervision of CIOP. Overseas entities were not responsible for any
error or omission of the work of such employees, CIOP bears all risk and
rewards associated with work performed by such employee
6.
Seconded employees continued to remain on the
payroll of their foreign employer, but CIOP reimburse their salary cost to
overseas entities. Thus overseas entities were not generating any profits from
the lending their personal to CIOP
7.
Seconded employees were rendering managerial
services to CIOP.
Held
1.
It was held by AAR, which was subsequently
confirmed by Hon’ble Delhi HC, that if
the employees continue on the payroll of the non-resident and have a lien on
their jobs in the non-resident multinational, a service PE can emerge if
services are rendered in India for specified periods following judgement of
Supreme Court in Morgan Stanley (292 ITR 416)
Critical Observations
·
It was simply held that since seconded person
are employees of foreign entities, utilisation of their service for specified
period in India will amount to PE of foreign Entities, irrespective of other factors critical for determination of PE.
·
Hereinafter below attempt is being made, to
understand other important factors which give indication that there is no PE in
the instant case and even if there is PE, No amount of profit can be attributed
to said PE.
Critical Factors Analysed
1.
Nature of Income from India.
2.
Nature of operations in India.
3.
Amount of profit which can be Attributed to PE
Nature of Income
1.
Article 5(2)(k) of India-UK treaty deal with
SERVICE PE, which provide for rendition of service by enterprise of contracting
state (R state) in other contracting
states (S state) for
more than 90 days in 12 month period, as essential condition for constitution
of SERVICE PE.
2.
Article 5(1) is basic/Fixed PE clause, which provides
that PE mean fixed place of business through which business of enterprise is
wholly or partly carried on. For Fixed place PE, following test needs to
satisfied:-
a)
Business Test – Carrying of business.
b)
Power of Disposition (Disposal Test)
c)
Permanence test – Geographically and Tenure
3.
It is well established that article 5(2) is not
an article independent of Article 5(1), but rather Article 5(2) has to be read jointly and harmoniously with Article 5(1).
For example , branch as provided in Article 5(2) will not become PE simpliciter
unless conditions of Article 5(1) are satisfied.
4.
In Article
5(2)(k), the power of disposition test and permanence test has been replaced
with a period of 90 days, but BUSINESS TEST is required to be satisfied in
order to constitute SERVICE PE.
5.
The
crucial point for consideration at this juncture is whether;-
a)
Whether every rendering of service by enterprise
of R
State in S state, irrespective
of nature of core business of enterprise will constitute PE in S State, thus amounting to carrying on
business in S state or
b)
Only when core business of enterprise is in the
realm of SERVICE business, then only SERVICE PE will be arise upon rendering of
service in S State.
6.
To be more precise, in the instant case:-
a)
Centrica PLC (FE) is engaged in the business of supplying
gas and electricity.
b)
In the course of business, FE lends its
personals to its subsidiary to assist the subsidiary in the supervision of its
works, which is deemed as rendering of service by Judicial authorities.
c) Will
such deemed rendering of service in India satisfied the BUSINESS TEST, as the
business of FE is not lending of persons but the supplying gas and electricity i.e
whether SERVICE PE is carrying on
business of FE in India.
7.
In order to understand satisfaction of BUSINESS
TEST of an activity, one of criterion is to determine which article of DTAA
governs taxability of income from activity of Enterprise in S State. If it falls under Article 7, then arises the need to evaluate
the existence of PE in S state, to which profit from such activities can be
attributed.
8.
The words
Enterprise is neither defined in treaty not in Income Tax Act. Enterprise can
be taken as carrying on business.
9.
It is not the case, that each and every income
of enterprise of R Sate from S state is taxable as Business Profit under
Article 7. It depends upon the nature of income and accordingly relevant
distributive rule will apply as under:-
a)
Income from Immovable Property – Article 6
b)
Business Profits – Article 7
c)
Dividend – Article 11
d)
Interest – Article 12
e)
Royalty and fees of Technical Service – Article
13
f)
Capital gain – Article 14
g)
Other Income – Article 23
8. Now crucial question is whether any income
digressed from main operation will constitute business income (attracting
Article 7) or other income (attracting Article 23). In the instant case,
lending of personal by FE is one-off activity being carried out without any
profit motive, thus all essential of business is lacking in said activity.
9.
So if income from such activity is other income
governed by Article 23, then there is no question for evaluation of PE in
India, because PE has relevance only when concerned income is business income
under Article 7 in S state, which can be attributed to PE.
Nature of Operations
1. Article
5(3) of India-UK treaty provides that there will not any constitution of PE if activities there at are confined to activities
which are solely of a preparatory or auxiliary character in nature.
2.
In instant case FE is engaged in the business of
supplying gas and electricity and it has appointed various vendors in India to
perform backup office work. In that process, it has established its subsidiary
(CIOP) to supervise the work of said vendors.
3. As per decision of Hon’ble supreme court in
DIT Vs Morgan Stanley (292 ITR 416), if
PE is engaged in the business of back up office work, it amount to carrying on
activities of auxiliary in nature.
4.
In the facts of the case, CIOP is supervising
the auxiliary activities of FE in India.
5.
In performance of function of supervision, CIOP
has availed the service of personal of FE, which is adjudicated as SERVICE PE
of FE in India.
6.
When
whole gamut of activity in India of FE is of auxiliary nature, rendering of
supervisory and managerial services by SERVICE PE will too fall under the
domain of activities of auxiliary nature.
7.
Thus when activities of FE in India is confined
to activities of auxiliary nature, there is no constitution of PE under Article
5.
Attribution of Profit to PE.
1.
Without prejudice to what is said above, even if
it assumed that FE has SERVICE PE in India, the big question is how much amount
of profit can be attributed to said PE.
2.
Article 7(1) of India –UK treaty provide as
under:-
“The profits of an enterprise of a
Contracting State shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on business as
aforesaid, the profits of the enter
price may be taxed in the other State but only so much of them as is directly
or indirectly attributable to that permanent establishment”
3.
In the instant case, FE has not earned any profit
from the business of lending of personal to CIOP, as it has just recovered the
salary cost of those personal from CIOP.
4.
Thus when no profit is being earned on business
activity by FE, then despite the carrying on business in S state through PE, no profit could be attributed to PE.
5. Thus even in the facts of case, even if
there is PE, there is no amount of profit which can be attributed to PE.
