Tax Insights

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1 PwC pwc.in

Tax Insights

24 July 2023

Independent projects need to be evaluated separately to determine PE threshold, despite performance of services by same sub-contractor, unless the applicable provisions specify aggregate approach – Delhi bench of the Tribunal

In brief

The taxpayer, a tax resident of Singapore, earned revenue from supply and installation of equipment. The installation of equipment was undertaken through a sub-contractor, and the employees of the sub-contractor visited India. Upon perusal of the facts and relevant provisions of the India–Singapore Double Taxation

Avoidance Agreement (DTAA), the Delhi bench of the Income-tax Appellate Tribunal¹ (Tribunal) was of the view that two unrelated independent projects need to be considered separately for the purpose of examination of permanent establishment (PE) threshold, unless the language of the provision specifically provides for an aggregate approach. Moreover, separate projects need not be considered a single integrated project merely because the service recipient or the sub-contractor providing the service is the same for those projects.

Regarding the computation of threshold days, the Tribunal observed that the actual duration of installation activity needs to be considered and date of invoice for supply of equipment is not relevant for this. Accordingly, the Tribunal concluded that the taxpayer did not have a PE in India, as the installation activities for the

individual project did not cross the specified threshold of 183 days.

In detail

Facts

• The taxpayer, a tax resident of Singapore, was engaged in the business of satellite telecommunication network operations and wholesale of electronic and telecommunication equipments and parts.

• During the years under consideration, the taxpayer supplied equipment, manufactured by original equipment manufacturer (OEM), to an Indian entity. The taxpayer also undertook installation of such equipment through OEM under a sub-contract arrangement as follows:

1 ITA Nos. 1831, 1832/Del/2022 & 451/Del/2023

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2 PwC Tax Insights

Site 1 Site 2

Start date 14 June 2017 8 November 2017

End date 29 July 2017 2 February 2018

Total days 46 days 87 days

• The taxpayer did not offer the income from the above activities in India, as it took a position that the same are not taxable in India.

• The case of the taxpayer was selected for scrutiny and the tax officer (TO) was of the view that:

- Installation for the same customer carried at two different sites should be considered together, as the projects are similar and related to each other. Moreover, the India–Singapore DTAA does not explicitly prohibit consideration of all project sites together.

- The total number of days from booking of first invoice for supply of equipment to last invoice for the said projects in aggregate is in excess of 183 days. Theref ore, the activities of the taxpayer constituted a PE under Articles 5(3) and 5(4) of the India–Singapore DTAA.

- The TO proceeded to apply the global net profit ratio on the total supply and installation receipts of the taxpayer, and attributed such profits to the PE in India and taxed the same.

Tribunal’s ruling and observations

• The Tribunal noted that it was not disputed that the manufacture and sale of equipment, title over the equipment and receipt of consideration were all undertaken outside India and, hence, such receipts would not be taxable in India.

• Regarding the installation receipts, upon perusal of facts of the case, the Tribunal observes that a PE would be constituted in India if the taxpayer: (i) operated a building site or construction, installation or assembly project for a period exceeding 183 days in the relevant year – (Installation PE – Article 5(3) of India–

Singapore DTAA); or (ii) carried out supervisory activity in connection with a building site or construction, installation or assembly project for a period exceeding 183 days – (Supervisory PE – Article 5(4) of India–

Singapore DTAA). Thus, the computation of threshold of 183 days was the key issue.

• The Tribunal rejected the revenue’s approach of reckoning the threshold of 183 days from the date of first invoice issued for supply of equipment. It categorically held that –

- The taxpayer procured the equipment from the OEM identified by the Indian entity for supply to the Indian entity, and installation, if any, is also provided by the employees of the OEM.

- Theref ore, the installation could commence only after the completion of manufacture of equipment and delivery of the same to the Indian entity.

- Accordingly, it is the actual date of commencement of installation activity that is relevant for the computation of threshold of 183 days.

• Regarding the revenue’s approach of considering both the projects as a single integrated project for the purpose of computation of threshold of 183 days, it held as follows.

- The materials on records indicate that the two projects are independent of each other. Merely because the said projects are for the same customer or commissioning and installation is undertaken by the same sub-contractor, it does not alter this position.

- The Tribunal noted that the language in similar provisions in the India–USA, India–Italy, or India–

Australia DTAAs specifically provides that a building site or construction, installation or assembly project, together with other such projects or activities, if continues for a specific period would constitute a PE. Such language is absent in the India–Singapore DTAA. Moreover, the relevant provision in the

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India–Singapore DTAA refers to ‘a’ building site or construction, installation or assembly project, and thus ‘a’ denotes a single project and not all projects in a combined manner.

- Theref ore, it concludes that each project site must be looked at independently and, in this case, as the threshold of 183 days is not exceeded in either of the installation project sites, the taxpayer does not have a PE in India.

• Accordingly, the Tribunal concludes that neither profits from supply of equipment nor installation and commissioning services are taxable in India.

The takeaways

While the Tribunal f ollows the settled principle that underlying facts determine whether individual projects need to be considered on a separate or integrated basis, this ruling also interprets the applicable provisions of t he India–Singapore DTAA in contrast with similar provisions in other DTAAs to arrive at this conclusion. While f acts form a prominent role, taxpayers also must be mindful of the language of the relevant provisions in the applicable DTAA, as DTAAs with different countries have different wordings. Some specifically provide for combined approach, and some are silent, thus providing for an individual or a split approach.

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pwc.in

In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Ident ity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

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