construction and service pe - 6 august 2011 - wirc seminar

Construction /

Installation and

Service Permanent

EstablishmentEstablishment

WIRC of India

Harsha Rawal

6 August 2011

Construction or

Installation PE

© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Discussion Draft 1

Meaning

Constituents of Construction/Installation PE UN Model OECD Model US Model

Building site � � �

Construction � � �

Assembly project � X X

Installation project � � �

Supervision activities in connection with above � X X


with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.2Discussion Draft

Supervision activities in connection with above � X X

Drilling rig used for exploration of natural

resources

X X �

Ship used for exploration of natural resources X X �

Duration – Lasts for more than 6 months 12 months 12 months

Indian Tax Treaties

Variations in Treaties Tax Treaty Countries

Supervisory activities not included explicitly Netherlands, Egypt, Sri Lanka, Slovenia, Malaysia, Libya,

Japan, France

Supervisory activities included explicitly Germany, Mauritius, Sweden, USA, UK, Norway

Aggregation of unrelated site or project Australia, Canada, China, Denmark, Italy, New Zealand,

Norway, Romania, Sweden, Turkey, Ukraine, USA

Project or supervisory activities incidental to sale of

plant and machinery where consideration exceeds 10%

of sale price

Belgium, Italy, Romania, Sweden, Turkey, UK



of sale price

Installation not covered in the definition Bangladesh, Belarus, Brazil, Ireland, Israel, Kenya, Libya,

Malta, Mauritius, Oman, Philippines, Vietnam, Zambia

Installation and assembly not covered in the definition Libya, Philippines

Construction not covered in the definition Libya

Variation in threshold between 3 to 12 months –

generally 6 months

Exception: Greece Treaty – One day constitutes PE

Additional clause for exploration / exploitation of natural

resources

� Netherlands, France, Denmark - exploration of natural

resources

� Italy, Ireland, China – exploration or exploitation of

natural resources

� Building site or construction projects include

� Buildings including renovation thereof

� Sewer systems

� Bridges or canals

� Excavating and dredging

� Laying of pipelines

� Demolition and clearing operations

Building site or Construction & Assembly or Installation Project


with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.4

� Assembly or installation projects include

� Assembly or re-grouping of pre-fabricated elements such as erection of steel scaffolding or units of production

� Installation of complex machines

� Installation of gas pipelines under river

� Laying of foundation of oil platform

Discussion Draft

The term installation includes assembly

� UN Model

� Specifically included in construction / installation PE clause

� OECD Model

� Not specifically included in construction / installation PE clause

� As per commentary – embedded in the definition

� US Model

Supervisory Activities



� US Model

� Not specifically included in construction / installation PE clause

� Supervisory activity carried out by third party

� where specifically included Construction / installation PE then it is a PE

� SAIL v. ACIT (10 SOT 351) (Del)

� where specifically not included in definition

� UN Model – not covered as Construction / installation PE – UDHE GmbH v. Dy. CIT (57 TTJ 447) (Mum)

� OECD – covered?

Discussion Draft

� Commencement

� Date on which physical work commences, including preparatory activities

� Cal Dive Marine Construction (Mauritius) Limited (315 ITR 314) (AAR)

� Cessation

� Site exists until work is completed or permanently abandoned

Determination of Threshold Period



The permanence element of a PE is replaced by a test of minimum length of time

Time on unrelated projects – to be clubbed?

� Threshold to be determined separately for each individual project

� Exception:

� Coherent whole commercially and geographically

� Specific provision for aggregation in DTAA

OECD MC

� 12 Months time applied to each individual site or project

Threshold Period – Issues…



� 12 Months time applied to each individual site or project

� India’s reservations :- Series of consecutive short term sites or projects operated by a contractor would lead to

PE

Judicial precedents

� J Ray McDermott Eastern Hemisphere Ltd (130 TTJ 121) (Mum)

� Krupp UDHE GmbH (28 SOT 254) (Mum)

� Valentine Maritime (Mauritius) Limited (2010-TIOL-195-ITAT-Mum)

Discussion Draft

Activities extending over more than one Calendar year or Assessment year

� If aggregate period exceeds threshold then PE in each year

� Krupp UDHE GmbH (28 SOT 254) (Mum)

� Clough Projects International Private Limited (2010-TII-55-ITAT-MUM-INTL)

� Difference in language vis-à-vis Article on Independent Personnel Services

� Presence of 183 days or more in relevant fiscal year

If treaty specifically provides for threshold vis-à-vis fiscal year

…Threshold Period – Issues…



If treaty specifically provides for threshold vis-à-vis fiscal year

� PE only in fiscal year where threshold is exceeded e.g. Singapore

Temporary Interruptions

� OECD, Skar, Klaus Vogel – To be included in threshold period e.g. Weather conditions, strikes, resource shortage

vacation

� Interruptions due to legal prohibition – whether included?

Discussion Draft

Subcontractors time

� OECD – to be included

� Pintsch Bamag (AAR) – not to be included

Preparatory Activities

� To be included?


…Threshold Period – Issues



Whether Article 5(2) / 5(3) relating to construction / installation PE override Article 5(1)?

� P. No. 24 of 1996 (237 ITR 798) (AAR)

� Brown & Root Inc., In re (153 CTR 18) (AAR)


Office or workshop in connection with construction or installation

� Test of Article 5(1) or 5(3)?

General Issues



Select Decisions



Steel Authority of India Ltd. Vs. ACIT (10 SOT 351) (Del)

� Facts

� M/s BMH Claudium Peters AG, Germany (BMH) provided technical supervisory services to SAIL in connection

with the installation of a steel project in India

� The services were rendered for more than six months

� The assessee and SAIL were of the view that the services were not covered under Article 5(2) of India-Germany

treaty as

� the installation of the project was not BMH’s responsibility

� the clause is attracted only where supervisory activities are carried out for the installation/assembly project

Select Decisions…



� the clause is attracted only where supervisory activities are carried out for the installation/assembly project

belonging to the assessee

� the services are covered under Article 12(4) of the India-Germany treaty

� there was no PE of BMH in India

� services are taxable at 10% on a gross basis in accordance with Article 12

� SAIL filed an application with the authorities to authorize the payment at 10% of WHT

� The duration of work in respect of each contract in India on standalone basis did not exceed 9 months

Discussion Draft

Steel Authority of India Ltd. Vs. ACIT (10 SOT 351) (Del)

� Held

� The supervisory activities could have resulted in a service PE where carried out for more than six months

irrespective of whether the project belonged to the assessee or not

� BMH had a PE in India on account of supervisory services in view of Article 5(2)

� Accordingly, the exclusionary provisions of clause 5 of Article 12 of the treaty were applicable

� The WHT rate of 30% is applicable in view of section 115A of the Act

…Select Decisions…



Cal Dive Marine Construction (Mauritius) Limited (315 ITR 314) (AAR)

� Facts

� Cal Dive Marine Construction (Mauritius) Limited (“the Company”) a tax resident of Mauritius has entered into an

agreement with an Indian Company for laying pipelines under the sea and constructing the structures

� The work consists of transportation and installation engineering, transportation, pre-trenching, pipe laying, back

filling, installation, pre-commissioning and surveys, erection , construction, testing and handing over services

� The activity such as completion of Pre-construction survey, completion of installation of pipeline and

demobilization of DLB Spread from site will be executed in India and all other activities will be executed outside

India except small portion of few services being executed in India wherein the duration was between 2-4 days




India except small portion of few services being executed in India wherein the duration was between 2-4 days

� The installation project was for period from October 2008 to April 2009

� Held

� Article 5 has to be read as a whole, harmonious interpretation of Article 5(1) and Article 5(2)(i)needs to be made

for constitution of PE

� The starting point of the contract cannot be prior to Pre-construction survey carried during October 2008 and the

overall duration for installation is less than 9 months period as required by Article 5(2)(i) and hence no

Installation PE in India

Discussion Draft

J Ray McDermott Eastern Hemisphere Ltd (130 TTJ 121) (Mum)

� Facts

� The Appellant Company is a Mauritius based company and is engaged in the business of installation of offshore

platforms, decks, pipelines, jackets and various other similar activities, for the purposes of mineral oil exploration

� The Appellant Company was engaged in executing certain installation contracts in Tapti and Panna offshore

fields in the Indian continental shelf

� In the absence of PE, the income was claimed as not liable to tax in India under India – Mauritius treaty

� The duration of work in respect of each contract in India on standalone basis did not exceed 9 months




� Held

� Even a plain reading of art. 5(2)(i) would show that, for the purpose of computing the threshold time-limit, what is

to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or a

supervisory activity connected therewith, and on all the activities in a tax jurisdiction as whole

� There is no specific mention about aggregating the number of days spent on various sites, projects or activities

� When aggregation is not specifically provided for in the relevant PE definition clause, normally it cannot be open

to infer the application of aggregation principle

Discussion Draft

Krupp UDHE GmbH (28 SOT 254) (Mum)

� Facts

� Krupp UDHE GmbH (“the Company”) a tax resident of Germany is engaged in the business of providing

technical know how, basic engineering services and supervisory services in connection with the construction or

installation of specified machinery

� The Company has engaged into several contracts to provide supervisory services to various Indian clients

� The period of stay of Krupp’s personnel in the relevant year did not exceed the threshold limit of 6 months

although the overall supervisory activities in India did exceed 6 months




� Held

� The duration of supervisory activities must be considered from the date of Contractor’s activities start and when

they finish and not start/end date of entire project

� In India Germany treaty, the duration of 183 days is to be counted over the period of activity and not in a financial

year or calendar year

� The aggregation of the activities of unconnected projects is unwarranted, in the absence of aggregation provision

under India Germany treaty

� The projects are not commercially or geographically coherent and there is no requirement to aggregate the time

spent on different contracts

Discussion Draft

Valentine Maritime (Mauritius) Limited (2010-TIOL-195-ITAT-MUM)

� Facts

� Valentine Maritime (Mauritius) Limited (“the Company”) a tax resident of Mauritius is engaged in the business of

marine and general engineering and construction

� The Company has executed 3 contracts in India one related to replacement of main deck with a temporary deck

and other two relating to barge hire contracts

� The individual duration of each of the contracts did not exceed the threshold limit of 9 months as provided in Indo

Mauritius treaty

� The assessing officer aggregated the period of three contracts and held that the Company Installation PE in




� The assessing officer aggregated the period of three contracts and held that the Company Installation PE in

India

� Held

� If aggregation is specifically provided for in the relevant PE definition clause, then only the time spent on different

contracts would be aggregated

� The 3 contracts were for different purpose and these contracts cannot be viewed as interconnected or

interdependent and accordingly the duration of each project cannot be aggregated

� The barge given on hire cannot be viewed as fixed place of carrying on its business as the Company was itself

engaged in the business of providing barge on hire

Discussion Draft

Clough Projects International Private Limited (2010-TII-55-ITAT-MUM-INTL)

� Facts

� Clough Projects International Private Limited (“ the Company”) a tax resident of Australia, is engaged in the

business of provision of engineering and construction services to various oil and gas companies in India

� The Company has entered into an agreement with BG Exploration and Production India Ltd. for the provision of

engineering, procurement and installation services

� During the financial year 2004-05, the work performed by the Company was limited to placing orders for the

offshore supply of steel and fabrication outside India

� The Company has not completed the time period of 6 months during the year as required by the Article 5(2)(K) of




� The Company has not completed the time period of 6 months during the year as required by the Article 5(2)(K) of

the India Australia treaty

� Held

� The Installation PE will commence when the supply of steel arrives at the oil well site which falls in the next

financial year

� No Installation PE since neither any installation event took place in India during the year nor the time period of

six months was completed during the year

Discussion Draft

Service PE



Overview of Service PE

Under the Act

• Section 92F(iiia) defines PE in an inclusive

manner - PE includes a fixed place of business

through which the business of the enterprise is

wholly or partly carried out

• Whether rendition of services through employees

could create PE in terms of section?

Under the UN Model

• Covered under Article 5

• Service PE - 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



• Remarks in the Morgan Stanley

project) within a Contracting State for a period or

periods aggregating more than six months within

any twelve-month period

� Furnishing of services by non-resident

� Through employees or other personnel

� For a specified period

Service PE – Pre-requisites


with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 21Discussion Draft

Permanence test of PE replaced by minimum length of time

� According to OECD, the business of an enterprise is carried on mainly by the entrepreneur or persons who are in

paid employment relationship with the enterprise (i.e. personnel). These personnel include employees and other

persons receiving instructions from the enterprise e.g. dependent agent

� Some issues arising in interpreting ‘other persons’ are:

� Whether non-individuals are included?

� Dependent agent could be non-individual

Other Personnel


with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

� Whether employees of another enterprise included?

� Is there an overlap between service PE and agency PE or are they mutually exclusive?

22Discussion Draft

� Different time periods specified under different treaties in relation to furnishing of services to an associated

enterprise and to a third party

Manner of Counting Number of Days

� Independent Project vs. Same / Connected Project

� Man days vs. Solar Days

� Period of stay spread over different financial year

Specified Period



Period of stay spread over different financial year

� Calendar month or 30 day period

Importance of placement in Article 5

� Placements in Indian DTAAs

� Service PE provision in Article 5(3) – Australia and Saudi Arabia

� Service PE provision in Article 5(2) - Canada, China, Nepal etc.

� Whether to constitute Service PE the requirements of Article 5(1) need to be satisfied?



Furnishing v. Rendering of services

� Recent decision of Linklaters

� Lawyers services can only be “rendered” and not “furnished”

� No difference between “rendering of services” and “furnishing of services”



Service PE vs. Fees for Technical Services

� UN Model doesn’t include the exception for FTS

� Majority of DTAAs signed by India which has a service PE clause specifically exclude income covered under

Article 12 (Fees for Technical Services)

� Further, Article 12 also specifically carves out the FTS income which is effectively connected to a PE

� In such a situation, whether specific head FTS overrides Service PE clause?



Service PE vs. FTS vs. Residuary Sources

Fits within the

definition of FTS?

Whether “make available”

condition applicable and

satisfied?

Not taxable

Taxable on gross

basis at treaty rate

Yes

No

Yes



Whether in the

nature of Business

Income?

Residuary clause

applies

Whether there is a

Service PE?

Profits attributable

to PE shall be

taxable

Not taxable

Taxable as per the

domestic laws

No

Yes

No

No

Yes

27Discussion Draft

Stewardship

� Stewardship services are rendered to protect the interest of the principal

� Sterwards are typically not involved in the day-to-day management or in rendering the services undertaken by the

service provider

� Their function is essentially of quality control and ensuring confidentiality

� Usually, the foreign enterprise does not receive fees from the recipient of such services and the cost of the

personnel performing these services are also borne by the foreign enterprise

� Given the above, stewardship activities do not lead to the constitution of a service PE



Secondment

� The typical features of a secondment are:

� An employee of enterprise X in State X is seconded to enterprise Y in State Y

� Employee continues on the payroll of enterprise X

� Employee resides and renders services in State Y

� Employee reports to enterprise Y

� The employee may continue to be paid by enterprise X who in turn is reimbursed by enterprise Y

� Right of Lien is on enterprise X



� Right of Lien is on enterprise X

� Supervision, control and management of employee is with enterprise Y

Morgan Stanley’s decisionMorgan Stanley’s decisionMorgan Stanley’s decisionMorgan Stanley’s decision Secondment Secondment Secondment Secondment

constitutes Services PE constitutes Services PE constitutes Services PE constitutes Services PE

Tekmark decisionTekmark decisionTekmark decisionTekmark decision ---- Secondment does not Secondment does not Secondment does not Secondment does not

constitute Services PE constitute Services PE constitute Services PE constitute Services PE

29Discussion Draft

Fund Structuring Issue

Asset Management

Company (AMC)Fund

Management Agreement

Advisory Services

under the Advisory Overseas

Employees of AMC

deputed to IAC



Indian

Advisory

Company (IAC)

under the Advisory

Agreement

Investee

Companies

Investments

India

Overseasdeputed to IAC

30Discussion Draft

Outsourcing of Services

Co A

Contract for

Provision of

ServicesOverseasSub-contract



Co. B Co. C

India

Provision of Services

through its employees

31Discussion Draft

Is there a PE exposure for Co. A on account of employees of Co. B rendering

services to Co. C?

References and other

material



OECD Model Commentary - Clause as suggested in the Commentary

“Notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a Contracting State performs

services in the other Contracting State

a. through an individual who is present in that other State for a period or periods exceeding in the aggregate 183

days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active

business activities of the enterprise during this period or periods are derived from the services performed in that

other State through that individual, or

b. for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are

performed for the same project or for connected projects through one or more individuals who are present and



performed for the same project or for connected projects through one or more individuals who are present and

performing such services in that other State,

the activities carried on in that other State in performing these services shall be deemed to be carried on through

a permanent establishment of the enterprise situated in that other State, unless these services are limited to

those mentioned in paragraph 4 which, if performed through a fixed place of business, would not make this fixed

place of business a permanent establishment under the provisions of that paragraph.”

33Discussion Draft

TreatyExclusion for FTS

No of days

AE Non-AE

Australia Yes One day 90 days

Botswana No 183 days

Canada Yes One day 90 days

China Yes 183 days

Iceland No 90 days

Namibia Yes six months

Nepal No 183 days

Number of days presence in different treaties



Nepal No 183 days

Norway No six months

Saudi Arabia No 182 days

Singapore Yes 30 days 90 days

Sri Lanka No 183 days

Swiss Confederation Yes 30 days 90 days

Syrian Arab Republic No 183 days

Thailand No 183 days

UAE No 9 months

UK Yes 30 days 90 days

USA Yes One day 90 days

34Discussion Draft

Select Decisions



Morgan Stanley’s Case

Facts of the case

� MS Co. is a US Company engaged in the business of

Investment banking

� MSAS is a wholly owned subsidiary and will perform

back office operations for the parent in India (‘Leg 1’)

� MS Co. will depute its employees to MSAS to provide

services to MSAS (‘Leg 2’)

MS Co.

WOS

US

India



MSAS

Employees

deputed

WOS

Back office

operations

Morgan Stanley’s Case

Fixed Place PE

� MSAS does not constitute a PE under Article 5(1) as MSAS performs only back office operations

� Further, activities performed by MSAS fall under Article 5(3)(e) i.e. they are preparatory and auxiliary activities

� Therefore, it is covered by the exceptions and accordingly MSAS does not constitute a PE

Service PE

� Employees deputed by MS Co. to MSAS as and when required by MSAS



� Employees deputed by MS Co. to MSAS as and when required by MSAS

� MS Co. had lien on the employees

� Therefore, MSAS constitutes a Service PE of MS Co.

Secondment does not constitute ‘Service PE’

Tekmark Global Solutions LLC’s case

� Employees seconded under a contract for hire of employees – Whether constitute Service PE?

� DDIT vs. Tekmark Global Solutions LLC (Mumbai ITAT) (ITA No. 671/Mum/2007)

� “Contract of Manpower supply” instead of “Contract of service”

� Employees to work under the direct supervision and control of Indian Company

� Indian company has a right to remove the employees

� Employees continue on the foreign company’s payroll

� Income earned not for services rendered through employees presence in India, but earned for providing



� Income earned not for services rendered through employees presence in India, but earned for providing

manpower to Indian company

Secondment constitutes ‘Service PE’

Thank You

Presentation by Harsha Rawal

Director

Direct : +91 22 3090 2790Direct : +91 22 3090 2790

Mobile: +91 9820328885

e-Mail: [email protected]

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The information contained herein is of a general nature and is not

intended to address the circumstances of any particular individual

or entity. Although we endeavor to provide accurate and timely

information, there can be no guarantee that such information is

accurate as of the date it is received or that it will continue to be

accurate in the future. No one should act on such information

without appropriate professional advice after a thorough

examination of the particular situation.

© 2011 KPMG, an Indian Partnership and a member firm of the

KPMG network of independent member firms affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss

entity. All rights reserved.

The KPMG name, logo and "cutting through complexity" are

registered trademarks or trademarks of KPMG International

Cooperative ("KPMG International").

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construction and service pe - 6 august 2011 - wirc seminar

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