Article 5

Article 5 — the law in short

What the courts have decided on section Article 5, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Union of India v U.A.E. Exchange Centre Supreme CourtHelps taxpayer
  My UAE client's Indian liaison office only downloads remittance instructions from the head office server and prints cheques on Indian banks. The Assessing Officer says that is a permanent establishment and wants to tax the whole remittance commission. Is he right?
  No, on these facts. The Supreme Court held that a liaison office whose only activity is downloading information from the head office server and printing and despatching cheques is carrying on an activity of a preparatory or auxiliary character, which Article 5(3)(e) of the India-United Arab Emirates DTAA expressly takes out of the expression 'permanent establishment'. Once the office is deemed by that legal fiction not to be a PE, Article 7 gives India no right to tax the enterprise's profits, and the deeming provisions in ss.5 and 9 of the Act 'can have no bearing whatsoever'.
• ADIT v E-Funds IT Solution Inc Supreme CourtHelps taxpayer
  We outsource back-office work to our Indian subsidiary. Does that give us a permanent establishment in India?
  No, not by itself. The Revenue must prove that a fixed place in India was at the disposal of the foreign company and that the foreign company carried on its own business through it. Close association between parent and subsidiary, and the fact that the Indian company depends on the group for its work, do not answer that question, and the functions-assets-risks analysis borrowed from transfer pricing is not the test for whether a fixed place permanent establishment exists.
• Formula One World Championship Ltd v CIT Supreme CourtHelps department
  We had access to an Indian venue for only a few days in the year. Can that be a permanent establishment?
  Yes. A place is at the disposal of an enterprise when the enterprise has the right to use it and control over it, and a fixed place permanent establishment needs stability, productivity and dependence rather than ownership or a long lease. The Buddh International Circuit was a fixed place through which Formula One World Championship Ltd carried on its commercial activity, so it had a permanent establishment in India.
• CIT v Nokia Network OY High CourtHelps taxpayerValidity unconfirmed
  We supply telecom equipment with embedded software to Indian operators through our Indian subsidiary. Is the subsidiary our permanent establishment, and is the software royalty?
  No on both counts, on these facts. A wholly-owned Indian subsidiary is a separate legal entity that contracts in its own name, and without proof that a place was at the disposal of the foreign company it is not a fixed place permanent establishment; a liaison office doing advertising and similar work falls within the preparatory and auxiliary exclusion. Software supplied as an integral part of the equipment is part of the sale of goods and not a licence, so the consideration is not royalty, and offshore supply completed outside India produces no Indian income.
• Saab Technologies B.V. v DCIT (International Taxation), Kolkata ITATHelps taxpayerValidity unconfirmed
  The Assessing Officer has added together my client's installation contract and the annual maintenance contract that followed it, crossed the treaty's duration threshold, found an installation permanent establishment and attributed 10 per cent of the receipts. Can he aggregate the two contracts?
  No. The Kolkata Tribunal held that providing annual maintenance services after the project or site has been handed over to the customer is not carrying out installation activities for the purpose of constituting an installation permanent establishment, so that the Assessing Officer's cumulative consideration of the original installation contract and the subsequent maintenance contract was bad in law and the resulting attribution of 10 per cent of the receipts was erroneous. On the duration itself the Tribunal held that the count does not start from the date of signing the contract, and that on the completion certificate and site readiness report the entire transaction was less than six months, so there was no PE under Article 5(3) of the India-Netherlands DTAA.
• Linklaters LLP v ACIT (International Taxation), Mumbai ITATHelps taxpayerValidity unconfirmed
  The Assessing Officer has taxed my client, a UK limited liability partnership, under the Independent Personal Services Article of the treaty because its partners are professionals. Can that Article apply to a firm at all?
  No, on this Tribunal's view. The Mumbai Tribunal held that Article 15 of the India-United Kingdom DTAA deals only with the taxability of independent personal services or independent activity of a similar character and not with a partnership firm, and that the assessee, not being an individual, was outside it. On the same order the Tribunal also held, following its own decisions in the assessee's earlier years, that the remuneration received for providing legal services was not fees for technical services and that the treaty overrode the Act.
• eBay International AG v ADIT ITATHelps taxpayer
  We charge Indian sellers a fee for listing on our overseas marketplace. Is that fees for technical services, and do our Indian support companies make us taxable here?
  No on both, and note how the second answer is reached. Providing a platform on which others transact is not the rendering of managerial, technical or consultancy services, so the user fees are not fees for technical services. On the treaty the Tribunal accepted that the Indian group companies, working exclusively for the Swiss company, were dependent agents - the assessee lost that limb - but held that a dependent agent becomes a permanent establishment only if it performs one of the functions listed in Article 5(5), and marketing and collection work is not among them. They were not a place of management either. Without a permanent establishment the business profits article keeps the income out of the Indian charge.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.