We are pleased to release a tax alert which summarizes a recent ruling of the Mumbai Income Tax Appellate Authority (Tribunal) in the case of Renoir Consulting Ltd. (Taxpayer) vs Dy. DIT (International – taxation) [ITA No. 4323& 4125/Mum/2011, ITA No. 5298/ Mum/2009] on whether a Mauritian company had a permanent establishment (PE) in India under the provisions of the India–Mauritius Double Taxation Agreement (DTAA), on account of the presence of its employees in India for a long duration of time to carry out a performance enhancement assignment spanning over 50 weeks under a contract entered into with an Indian company. On the facts, the Tribunal concluded that the premises of the client or the hotel where the employees stayed could be regarded as a fixed place through which the business of the Taxpayer was carried on. Accordingly, a fixed place PE of the Taxpayer existed in India.
A fixed place PE is triggered if an FE performs a business activity through a fixed place of business. In order to be able to actually use the place of business, the taxpayer must have some control over it or have it at its disposal. A vexed issue that has often arisen is whether the taxpayer should have the legal right to use the place of business or, more accurately, the right not to be denied the use of the fixed place of business. It is recognized that formal control is not what one should seek here but, rather, the power to use the place of business, since the focus is on the actual use of the place for business activities. As acknowledged by the Tribunal, this is a factual inquiry.
The OECD Commentary on Article 5 states that, while no formal legal right to use a particular place is required for that place to constitute a PE, the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of the enterprise. The 2012 OECD Discussion Draft seeks to clarify that the intensity of actual presence in a place will determine whether it is a place of business for the purposes of Article 5 and not a legal right to use it. In addition, it proposes to clarify that mere intermittent or incidental presence in a place is not sufficient to make it a place of business.
On the facts of the case, the Tribunal held that the Taxpayer had a factual right to carry out its business from either the client’s premises or from the hotel, which could result in a fixed place PE. Foreign companies undertaking consultancy projects in India would need to review the impact of this ruling on their activities to assess whether the protracted presence of their employees in India could trigger a PE under an applicable DTAA.
A fixed place PE is triggered if an FE performs a business activity through a fixed place of business. In order to be able to actually use the place of business, the taxpayer must have some control over it or have it at its disposal. A vexed issue that has often arisen is whether the taxpayer should have the legal right to use the place of business or, more accurately, the right not to be denied the use of the fixed place of business. It is recognized that formal control is not what one should seek here but, rather, the power to use the place of business, since the focus is on the actual use of the place for business activities. As acknowledged by the Tribunal, this is a factual inquiry.
The OECD Commentary on Article 5 states that, while no formal legal right to use a particular place is required for that place to constitute a PE, the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of the enterprise. The 2012 OECD Discussion Draft seeks to clarify that the intensity of actual presence in a place will determine whether it is a place of business for the purposes of Article 5 and not a legal right to use it. In addition, it proposes to clarify that mere intermittent or incidental presence in a place is not sufficient to make it a place of business.
On the facts of the case, the Tribunal held that the Taxpayer had a factual right to carry out its business from either the client’s premises or from the hotel, which could result in a fixed place PE. Foreign companies undertaking consultancy projects in India would need to review the impact of this ruling on their activities to assess whether the protracted presence of their employees in India could trigger a PE under an applicable DTAA.
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