SERVICE PE
* UN MC 5 (3)(b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period. SERVICE PE *UN MC brought this concept
Ø furnishing of services, including consultancy services
Ø through employees or other personnel engaged by the enterprise for such purpose
Ø If activities of such nature continue for more than six months in twelve month period in the source state
Ø for the same or connected project SERVICE PE
Ø UN MCC – para 9 – Management and Consultancy services by corporations of developed nations – involve very large sums of money - should be covered
Ø for the same or connected project
Ø only profits attributable to such service activity are taxable in source country
Ø Services of any kind lead to a PE ?
Ø Services covered by Art. dealing with Royalty & FTS excluded from service PE
SERVICE PE * India’s treaties
Ø 14 treaties
Ø The time period ranges from 90 days to 183 days – in one case nine months period
Ø services to AE – shorter time period
Ø If no time limit – even one day triggers PE SERVICE PE * India’s treaties
Ø Australia & Malta – treaties include that PE exists if “substantial equipment is being used”
Ø In case of Malta – PE triggers for supervisory activities – in connection with such equipment SERVICE PE * India’s treaties
Ø Canada & USA – protocol added – to provide that when the services extend over two tax years – PE does not arise in the year where the period of service is less than thirty days
Ø The time period measurement – “fiscal year” & “in any twelve month period” SERVICE PE * Case law
Ø Morgan Stanley & Co. (2007) 292 ITR 416 (SC) * Arm’s length payment for functions performed - no further attribution Ø Golf in Dubai, LLC, In re (2008) 306 ITR 374 (AAR) * Service PE – provider & receiver of services essential SERVICE PE * OECD updates 2008
Ø Service PE concept brought in – MCC.
Ø Specific exclusion – activities- Cl.(4).
Ø Services to HO – no service PE.
Ø “Personnel” – term not used.
Ø Threshold – 183 days – no multiple counting.
Ø No need to comply basic rule Cl.(1). - Old DTCs not hit – allows new ones to have this provision. AGENCY PE Art. 5(5) - OECD Model
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 6 applies is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. AGENCY PE Art. 5(6)- OECD Model
6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. AGENCY PE Art. 5(5) UN-Model Commentary
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 7 applies—is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person: AGENCY PE Art. 5(5) UN-Model Commentary • Has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) Has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. AGENCY PE Art. 5 (6) – UN – Model Commentary
6. Notwithstanding the preceding provisions of this article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 7 applies. AGENCY PE Art. 5 (7) – UN – Model Commentary
7. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, and conditions are made or imposed between that enterprise and the agent in their commercial and financial relations which differ from those which would have been made between independent enterprises, he will not be considered an agent of an independent status within the meaning of this paragraph.
AGENCY PE * Comparison of OECD/UN Art. 5(5) Ø Criteria a PE comes into existence under Para 5 if
• A person other than an independent agent to whom para 6 (OECD) / Para 7 (UN-model) applies.
• Acts in a contracting state on behalf of an Enterprise of the other contracting state - authority to conclude contracts in the name of Enterprise
• Exception – preparatory/ auxiliary activities
• Under UN MC – PE triggers – dep. Agent – delivers goods – on behalf of Enterprise – from stock maintained AGENCY PE * Dependent / Independent Agent Ø Extent of obligations vis-a-vis Enterprise
Ø Dep. Agent – bound to follow instructions – like employee – dependent – personally & materially
• Legal dependence – significant control – detailed instructions
• Exclusive agent Ø Ind. Agent – special skill / knowledge – freedom – providing – substantial information – seeking approval? – no. of principals – autonomy – bears risks – receives rewards – legal & economic independence
AGENCY PE * Dependent / Independent Agent
Ø Acting outside the ordinary course of business – Ind. Agent – customary business activities – to be examined
Ø UN MC – provides that entire commercial & financial relations between the enterprise and the agent – if differ from those – between independent enterprises at Arm’s length – agent - not ind. Agent
AGENCY PE * Authority to conclude contracts
Ø A dep. person also having
Ø Authority to conclude contracts – involve foreign enterprise – business activities in source state
Ø Either individuals / companies – need not be residents – need not have place of business in source state
Ø Contracts – in the name of enterprise / own name but binds enterprise – lack of active involvement by Enterprise – authority to agent
Ø Authority – relating to core business operations – not relating to internal operations – habitual exercise
Ø to negotiate all elements & details – contract – binds enterprise – not simple participation
Ø repeatedly and not in isolated cases Ø This test is alternative to Art. 5 (1) & (2) Ø Post of an agent – change of person does not matter
Ø Indo-US treaty – understanding – “habitually secures orders” – lists following criteria
§ Agent frequently accepts orders
§ Substantial activity – sales related activity – relate to the enterprise
§ Agent habitually confirms – his acceptance - to be that of enterprise for supply of goods – terms as specified in order
§ Actions of Enterprise give purchasers reasonable belief that agent has authority to bind enterprise
AGENCY PE * Habitual maintenance of stock – delivery * UN MC – Art. 5 (5)(b)
Ø has no authority to conclude contracts Ø but habitually maintains stock of goods / merchandise Ø regularly delivers out of such stock on behalf of the enterprise * Triggers PE * Sales related activity takes place outside the source state only delivery in source state – no PE
* Sales related activity also done in source state – delivery may trigger PE – para 25 – UN MCC AGENCY PE *
UN MC - Insurance PE
Ø Para 6 separately deals with – Insurance Enterprise of one sate – collecting premiums / insures risks - through a person who is not independent - triggers PE in source state
Ø Para 39 – OECD – MCC also endorses this approach though no specific rule exists in Article
Ø Reinsurance business excluded
AGENCY PE * India’s treaties
Ø 44 treaties contain sub-para (b) of Art. 5(5) of UN MC – delivery agent clause
Ø 3 treaties – delivery agent clause in a restricted manner – Canada, Portugal & USA
Ø 29 treaties “habitual securing of orders” / “the manufacture or processing, for the enterprise” - trigger PE
Ø 19 treaties – model clauses adopted as it is - - 12 in line with OECD rules - 7 in line with UN pattern AGENCY PE * Case law
Ø SET satellite (Singapore) Pte. Ltd. (2008) 307 ITR 205 (Bom)
Ø Galileo International Inc (2008) 19 SOT 257 (Del)
Ø Morgan Stanley & Co. (2007) 292 ITR 416 (SC)
Ø XYZ / ABC Equity Fund, In re, 250 ITR 194 (AAR)
Ø Al Nisr Publishing, In re, 239 ITR 879 (AAR)
AGENCY PE * Case Law:
2010 – TIOL – 50 – ITAT – Del. BBC Group – BWIPL Singapore International Headquarters Pvt. Ltd. v. DIT (AAR)
Ø furnishing of services, including consultancy services
Ø through employees or other personnel engaged by the enterprise for such purpose
Ø If activities of such nature continue for more than six months in twelve month period in the source state
Ø for the same or connected project SERVICE PE
Ø UN MCC – para 9 – Management and Consultancy services by corporations of developed nations – involve very large sums of money - should be covered
Ø for the same or connected project
Ø only profits attributable to such service activity are taxable in source country
Ø Services of any kind lead to a PE ?
Ø Services covered by Art. dealing with Royalty & FTS excluded from service PE
SERVICE PE * India’s treaties
Ø 14 treaties
Ø The time period ranges from 90 days to 183 days – in one case nine months period
Ø services to AE – shorter time period
Ø If no time limit – even one day triggers PE SERVICE PE * India’s treaties
Ø Australia & Malta – treaties include that PE exists if “substantial equipment is being used”
Ø In case of Malta – PE triggers for supervisory activities – in connection with such equipment SERVICE PE * India’s treaties
Ø Canada & USA – protocol added – to provide that when the services extend over two tax years – PE does not arise in the year where the period of service is less than thirty days
Ø The time period measurement – “fiscal year” & “in any twelve month period” SERVICE PE * Case law
Ø Morgan Stanley & Co. (2007) 292 ITR 416 (SC) * Arm’s length payment for functions performed - no further attribution Ø Golf in Dubai, LLC, In re (2008) 306 ITR 374 (AAR) * Service PE – provider & receiver of services essential SERVICE PE * OECD updates 2008
Ø Service PE concept brought in – MCC.
Ø Specific exclusion – activities- Cl.(4).
Ø Services to HO – no service PE.
Ø “Personnel” – term not used.
Ø Threshold – 183 days – no multiple counting.
Ø No need to comply basic rule Cl.(1). - Old DTCs not hit – allows new ones to have this provision. AGENCY PE Art. 5(5) - OECD Model
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 6 applies is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. AGENCY PE Art. 5(6)- OECD Model
6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. AGENCY PE Art. 5(5) UN-Model Commentary
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 7 applies—is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person: AGENCY PE Art. 5(5) UN-Model Commentary • Has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) Has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. AGENCY PE Art. 5 (6) – UN – Model Commentary
6. Notwithstanding the preceding provisions of this article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 7 applies. AGENCY PE Art. 5 (7) – UN – Model Commentary
7. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, and conditions are made or imposed between that enterprise and the agent in their commercial and financial relations which differ from those which would have been made between independent enterprises, he will not be considered an agent of an independent status within the meaning of this paragraph.
AGENCY PE * Comparison of OECD/UN Art. 5(5) Ø Criteria a PE comes into existence under Para 5 if
• A person other than an independent agent to whom para 6 (OECD) / Para 7 (UN-model) applies.
• Acts in a contracting state on behalf of an Enterprise of the other contracting state - authority to conclude contracts in the name of Enterprise
• Exception – preparatory/ auxiliary activities
• Under UN MC – PE triggers – dep. Agent – delivers goods – on behalf of Enterprise – from stock maintained AGENCY PE * Dependent / Independent Agent Ø Extent of obligations vis-a-vis Enterprise
Ø Dep. Agent – bound to follow instructions – like employee – dependent – personally & materially
• Legal dependence – significant control – detailed instructions
• Exclusive agent Ø Ind. Agent – special skill / knowledge – freedom – providing – substantial information – seeking approval? – no. of principals – autonomy – bears risks – receives rewards – legal & economic independence
AGENCY PE * Dependent / Independent Agent
Ø Acting outside the ordinary course of business – Ind. Agent – customary business activities – to be examined
Ø UN MC – provides that entire commercial & financial relations between the enterprise and the agent – if differ from those – between independent enterprises at Arm’s length – agent - not ind. Agent
AGENCY PE * Authority to conclude contracts
Ø A dep. person also having
Ø Authority to conclude contracts – involve foreign enterprise – business activities in source state
Ø Either individuals / companies – need not be residents – need not have place of business in source state
Ø Contracts – in the name of enterprise / own name but binds enterprise – lack of active involvement by Enterprise – authority to agent
Ø Authority – relating to core business operations – not relating to internal operations – habitual exercise
Ø to negotiate all elements & details – contract – binds enterprise – not simple participation
Ø repeatedly and not in isolated cases Ø This test is alternative to Art. 5 (1) & (2) Ø Post of an agent – change of person does not matter
Ø Indo-US treaty – understanding – “habitually secures orders” – lists following criteria
§ Agent frequently accepts orders
§ Substantial activity – sales related activity – relate to the enterprise
§ Agent habitually confirms – his acceptance - to be that of enterprise for supply of goods – terms as specified in order
§ Actions of Enterprise give purchasers reasonable belief that agent has authority to bind enterprise
AGENCY PE * Habitual maintenance of stock – delivery * UN MC – Art. 5 (5)(b)
Ø has no authority to conclude contracts Ø but habitually maintains stock of goods / merchandise Ø regularly delivers out of such stock on behalf of the enterprise * Triggers PE * Sales related activity takes place outside the source state only delivery in source state – no PE
* Sales related activity also done in source state – delivery may trigger PE – para 25 – UN MCC AGENCY PE *
UN MC - Insurance PE
Ø Para 6 separately deals with – Insurance Enterprise of one sate – collecting premiums / insures risks - through a person who is not independent - triggers PE in source state
Ø Para 39 – OECD – MCC also endorses this approach though no specific rule exists in Article
Ø Reinsurance business excluded
AGENCY PE * India’s treaties
Ø 44 treaties contain sub-para (b) of Art. 5(5) of UN MC – delivery agent clause
Ø 3 treaties – delivery agent clause in a restricted manner – Canada, Portugal & USA
Ø 29 treaties “habitual securing of orders” / “the manufacture or processing, for the enterprise” - trigger PE
Ø 19 treaties – model clauses adopted as it is - - 12 in line with OECD rules - 7 in line with UN pattern AGENCY PE * Case law
Ø SET satellite (Singapore) Pte. Ltd. (2008) 307 ITR 205 (Bom)
Ø Galileo International Inc (2008) 19 SOT 257 (Del)
Ø Morgan Stanley & Co. (2007) 292 ITR 416 (SC)
Ø XYZ / ABC Equity Fund, In re, 250 ITR 194 (AAR)
Ø Al Nisr Publishing, In re, 239 ITR 879 (AAR)
AGENCY PE * Case Law:
2010 – TIOL – 50 – ITAT – Del. BBC Group – BWIPL Singapore International Headquarters Pvt. Ltd. v. DIT (AAR)
