India: Ruling on Service PE trigger on deputation and income effectively connected to PE

Rajendra Nayak		Aastha Jain

The Delhi Income Tax Appellate Tribunal (Tribunal) recently ruled in the JC Bamford Excavators Ltd. (JCB) case on the tax implications arising from the grant of use of intellectual property rights (IPRs) and deputation of personnel by the taxpayer to a wholly owned Indian subsidiary (I Co), under the Indian tax law (ITL) as well as the India-UK tax treaty. JCB, a UK company, was engaged in the business of manufacture, assembly, design and sale of material handling equipment. It entered into a Technology Transfer Agreement (TTA) with I Co to enable it to manufacture the standard equipment. The taxpayer granted a licence to use IPRs; provided technical documents containing know–how and engineering skills; conducted quality checks and provided technical assistance to I Co by deputation of technical consultants (assignees) to work in India under an International Personnel Assignment Agreement (IPAA).

The tax authorities contended royalty payments made by I Co are effectively connected with a service permanent establishment (PE) in India and hence taxable as business profits at full rate of tax under the treaty as well as ITL.

The Tribunal held that:

• Occasional visits of employees of JCB to India for conducting quality check on products manufactured by I Co, was required by and in the interest of the taxpayer. Such activities are stewardship activities which cannot be considered for constituting a PE in India.

• Assignees deputed to India for providing technical assistance to I Co continued to be employees of the taxpayer based on various factors of the arrangement. Such Assignees provided services on behalf of taxpayer under the TTA and hence, created a Service PE in India.

• Under the treaty, where a payment towards royalty or fees for technical services (FTS) is effectively connected with a PE through which the taxpayer carries on business in India, then such royalty/FTS would be taxed as business profits under the tax treaty. Such effective connection should exist between the PE on one hand and the right, property or contract on the other which result in such royalties or FTS.

• Consideration paid for granting the IPR qualified as royalty. As the assignees had no role in granting, creating or making available the IPR to I Co, such royalty was not effectively connected to the service PE. Hence, it will be taxable on a gross basis under the treaty.

• Consideration received for provision of assignees, was for the application/enjoyment of IPR and therefore qualified as FTS. As the contract of IPAA was effectively connected with the service PE, FTS arising out of such contract would be taxable as business profits under the treaty.

This ruling addresses issues of royalty and FTS taxation as well as service PE emergence on deputation/assignment of personnel to an Indian entity under cross-border business arrangements, involving technical collaboration for use of IPRs and assignment of employees for assistance thereof.

Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)

EY

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