Facts:
1. Centrica Plc, a company incorporated in UK, along with foreign subsidiaries in Canada, collectively referred to as “Overseas Entities” were engaged in the business of supplying gas and electricity to consumers across UK and Canada.
2. The overseas entities outsource their back office support function (Debt collection/consumers billing/monthly jobs) to third party vendors in India.
3. To ensure that Indian vendors comply with quality guidelines, Centrica Indian Offshore (P) Ltd (CIOP), as subsidiary of Centrica Plc. was established to provide locally based interface between overseas entities and Indian Vendors.
4. To seek support during initial years, CIOP sought some employees from overseas entities (From UK and Canada) on secondment for some duration.
5. Employees so seconded worked under direct control and supervision of CIOP. Overseas entities were not responsible for any error or omission of the work of such employees, CIOP bears all risk and rewards associated with work performed by such employee
6. Seconded employees continued to remain on the payroll of their foreign employer, but CIOP reimburse their salary cost to overseas entities. Thus overseas entities were not generating any profits from the lending their personal to CIOP
7. Seconded employees were rendering managerial services to CIOP.
Held
It was held by AAR, which was subsequently confirmed by Hon’ble Delhi HC, that if the employees continue on the payroll of the non-resident and have a lien on their jobs in the non-resident multinational, a service PE can emerge if services are rendered in India for specified periods following judgement of Supreme Court in Morgan Stanley (292 ITR 416)
Critical Observations
1. It was simply held that since seconded person are employees of foreign entities, utilisation of their service for specified period in India will amount to PE of foreign Entities, irrespective of other factors critical for determination of PE.
2. Hereinafter below attempt is being made, to understand other important factors which give indication that there is no PE in the instant case and even if there is PE, No amount of profit can be attributed to said PE.
Critical Factors Analysed
1. Nature of Income from India.
2. Nature of operations in India.
3. Amount of profit which can be Attributed to PE
Nature of Income
1. Article 5(2)(k) of India-UK treaty deal with SERVICE PE, which provide for rendition of service by enterprise of contracting state (R state) in other contracting states (S state) for more than 90 days in 12 month period, as essential condition for constitution of SERVICE PE.
2. Article 5(1) is basic/Fixed PE clause, which provides that PE mean fixed place of business through which business of enterprise is wholly or partly carried on. For Fixed place PE, following test needs to satisfied:-
a. Business Test – Carrying of business.
b. Power of Disposition (Disposal Test)
c. Permanence test – Geographically and Tenure
3. It is well established that article 5(2) is not an article independent of Article 5(1), but rather Article 5(2) has to be read jointly and harmoniously with Article 5(1). For example , branch as provided in Article 5(2) will not become PE simpliciter unless conditions of Article 5(1) are satisfied.
4. In Article 5(2)(k), the power of disposition test and permanence test has been replaced with a period of 90 days, but BUSINESS TEST is required to be satisfied in order to constitute SERVICE PE.
5. The crucial point for consideration at this juncture is whether;-
a. Whether every rendering of service by enterprise of R State in S state, irrespective of nature of core business of enterprise will constitute PE in S State, thus amounting to carrying on business in S state or
b. Only when core business of enterprise is in the realm of SERVICE business, then only SERVICE PE will be arise upon rendering of service in S State.
6. To be more precise, in the instant case:-
a. Centrica PLC (FE) is engaged in the business of supplying gas and electricity.
b. In the course of business, FE lends its personals to its subsidiary to assist the subsidiary in the supervision of its works, which is deemed as rendering of service by Judicial authorities.
c. Will such deemed rendering of service in India satisfied the BUSINESS TEST, as the business of FE is not lending of persons but the supplying gas and electricity i.e whether SERVICE PE is carrying on business of FE in India.
7. In order to understand satisfaction of BUSINESS TEST of an activity, one of criterion is to determine which article of DTAA governs taxability of income from activity of Enterprise in S State. If it falls under Article 7, then arises the need to evaluate the existence of PE in S state, to which profit from such activities can be attributed.
8. The words Enterprise is neither defined in treaty not in Income Tax Act. Enterprise can be taken as carrying on business.
9. It is not the case, that each and every income of enterprise of R Sate from S state is taxable as Business Profit under Article 7. It depends upon the nature of income and accordingly relevant distributive rule will apply as under:-
a. Income from Immovable Property – Article 6
b. Business Profits – Article 7
c. Dividend – Article 11
d. Interest – Article 12
e. Royalty and fees of Technical Service – Article 13
f. Capital gain – Article 14
g. Other Income – Article 23
10. Now crucial question is whether any income digressed from main operation will constitute business income (attracting Article 7) or other income (attracting Article 23). In the instant case, lending of personal by FE is one-off activity being carried out without any profit motive, thus all essential of business is lacking in said activity.
11. So if income from such activity is other income governed by Article 23, then there is no question for evaluation of PE in India, because PE has relevance only when concerned income is business income under Article 7 in S state, which can be attributed to PE.
Nature of Operations
1. Article 5(3) of India-UK treaty provides that there will not any constitution of PE if activities there at are confined to activities which are solely of a preparatory or auxiliary character in nature.
2. In instant case FE is engaged in the business of supplying gas and electricity and it has appointed various vendors in India to perform backup office work. In that process, it has established its subsidiary (CIOP) to supervise the work of said vendors.
3. As per decision of Hon’ble supreme court in DIT Vs Morgan Stanley (292 ITR 416), if PE is engaged in the business of back up office work, it amount to carrying on activities of auxiliary in nature.
4. In the facts of the case, CIOP is supervising the auxiliary activities of FE in India.
5. In performance of function of supervision, CIOP has availed the service of personal of FE, which is adjudicated as SERVICE PE of FE in India.
6. When whole gamut of activity in India of FE is of auxiliary nature, rendering of supervisory and managerial services by SERVICE PE will too fall under the domain of activities of auxiliary nature.
7. Thus when activities of FE in India is confined to activities of auxiliary nature, there is no constitution of PE under Article 5.
Attribution of Profit to PE.
1. Without prejudice to what is said above, even if it assumed that FE has SERVICE PE in India, the big question is how much amount of profit can be attributed to said PE.
2. Article 7(1) of India –UK treaty provide as under:-
“The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment”
3. In the instant case, FE has not earned any profit from the business of lending of personal to CIOP, as it has just recovered the salary cost of those personal from CIOP.
4. Thus when no profit is being earned on business activity by FE, then despite the carrying on business in S state through PE, no profit could be attributed to PE.
5. Thus even in the facts of case, even if there is PE, there is no amount of profit which can be attributed to PE.
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