Recently, one of the tax tribunals in India dismissed the appeal filed by Telenor ASA (taxpayer) for AY 2010-11 and held that providing Inter-connected, interlaced, and sequential technical services under a unified agreement constitutes a Permanent Establishment (PE) in India.
Facts of the Case
A taxpayer is a tax resident of Norway entered into Business Service Agreement with Unitech Wireless (Tamil Nadu) India P. Ltd for providing services to the latter through different service order forms (SOFs) under various nature of activities such a Sourcing, Marketing, IT/IS, HR and other contracts. Being in the nature of ‘Fees for technical Service’(FTS) as per Article 12 of the India-Norway Double Taxation Avoidance Agreement (DTAA), taxpayer furnished the return of income declaring an income of 1.75 Mn USD for AY 2010-11.
The tax authorities cited the below mentioned reasons and held that the taxpayer company had PE in India:
1) Taxpayer’s employees stayed in India for a period of 260 days, which exceeds the threshold provided in Article 5 of the India-Norway DTAA.
2) The consultancy services rendered by various employees are for the same project.
3) The SOFs were in the nature of job orders where the activities to be performed, its details and persons rendering such services are mentioned and the clauses of SOFS bind it to the agreement between the parties.
4) The arrangement of rendering services and payment of fee were made in accordance with the agreement, hence concluding that SOFs are not separate agreements.
5) Fees received from Unitech Wireless, which was in the nature of FTS was effectively connected with PE of the Taxpayer and in terms of Article 12(5), Taxpayer’s income was liable to be taxed as per Article 7 of the treaty read with section 44DA. Section 44DA is broader and more general in nature and provides for assessment of the income of the non-resident by way of royalty or fees for technical services, where such non-resident carries on business in India through a permanent establishment situated in India.
The tax officer in an assessment order held that taxpayer has a PE in India and attributed 100% of the receipts of 1.11 Mn USD after allowing expenses at 40% to the PE. However, taxpayer contended that only 3.38% of the revenues (3.5% markup on cost) could be considered as income attributable to the PE.
Post rejection of taxpayer’s objections by the tax authorities on the bases of billings scheme that shows consolidated invoices and showed that various SOFs have operated as a single project, taxpayer appealed before tax tribunal.
Taxpayer’s Contentions
1) Against tax authorities’ contention that SOFs executed are to be considered as part of the same project, Taxpayer argued that the words ‘same’ or ‘connected’ should be interpreted from the perspective of the service provider as clarified in the Model Tax Convention on Income and on Capital.
2) Stay of employees of taxpayer in India was in respect of multiple independent projects and hence, such stay does not exceed 6 months per project.
3) Various SOFs constitute separate projects and activities cannot be considered as single consolidated activities. Services rendered under an SOF is independent or not linked with performance of services under other SOFs in any manner.
4) Functions like HR and marketing should be treated as separate projects and hence, should not be under consideration for determining the period of stay for the purpose of ‘Duration Test’ under Article 5(2)(1) of the DTAA.
5) There was no PE in India prior to the visit of taxpayer’s personnel to India which resulted in constitution of taxpayer’s PE in India and FTS cannot be said to be ‘effectively connected’ to any pre-existing PE and hence the provisions of Article 12 have no application.
Tax Authorities Contentions
Same or similar type of services are not different. It was an inclusive definition of services and mandates that services whether similar or not, including consultancy services of the same project are to be treated as connected projects for checking of total duration of activity. But in OECD commentary on this explanation, that the explanation is limited to 2 different projects and distinct service project wise. It does not deal with the position where it is a case of a single project with a bouquet of interconnected services.
Various SOFs were interlaced and that one could not start SOF of marketing till the SOF of sourcing was complete, and that one SOF was the feeder for the other.
Furthermore, Taxpayer wants to apply mark-up of 3.5% on cost (or 3.38%) on sale, instead of AO’s action which is estimating expenses at 40% of the revenue. However, where cost detail and documentary evidence are not available, AO’s action was appropriate.
Key Considerations
1) The tax tribunal observed that launch of UNINOR services happened after Telenor Group finalized the transaction with Unitech group and made the first investment into UNINOR. On perusal of UNINOR’s managing director’s statement at launch of UNINOR, TAX TRIBUNAL remarked that it augmented the fact that only two entities were involved, UNINOR and the Taxpayer.
2) Tax Tribunal further observed that bills were raised on quarterly basis, and consolidated invoices were raised irrespective of the SOFs under which the services were rendered. Tax Tribunal remarked that the common billing by the recipient and the common payments give rise to a conclusion that it was one single contract.
3) In SOFs, it was continuously mentioned therein that contracts are performed in accordance with the service agreement between UNINOR and Taxpayer, where Taxpayer was referred to as Contractor and UNINOR as recipient for all the services.
4) Tax Tribunal remarked that activities of the taxpayer with regard to the recipients of services can be said to be inter-connected, interlaced and sequential technical services. Further, it could not be said that they were unrelated to each other as none of the activity could stand in isolation to each other and no single activity could give rise to performance and achieving the purpose of the recipient.
5) Tax Tribunal observed that in the instant case, the implementation of one SOF leads to another, and it can be observed that they are well integrated, the outcome of one SOF becomes the inputs for the other. 6) Based on the unified agreement, consolidated billing pattern and the inter-relation amongst the activities, Tax Tribunal held that the existence of the PE of Taxpayer was undeniable.
Our View:
The project here consists of bundle of inter-connected and interrelated services with the underlying theme of completion of projects. In the instant case, the implementation of one SOF leads to the other and it can be observed that they are well integrated, the outcome of one SOF become the inputs for the other SOF. Thus, based on the unified agreement, consolidated billing pattern, the activities being interrelated, it may be very well said that PE exposure in India is quite certain in such scenarios.
