DTAA art 5

DTAA art 5 — the law in short

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

• WorleyParsons Services Pty Ltd v DIT (International Taxation) Advance RulingCuts both waysValidity unconfirmed
  Our Australian firm monitors a pipeline project in India for the owner - schedules, reporting, coordinating contractors. Is our fee a royalty, or business profits we are taxed on only if we have a permanent establishment?
  It depends, and the applicant won half. The Authority ruled that WorleyParsons's receipts under its project monitoring contract with GAIL were not royalties under article 12 of the India-Australia agreement, because merely rendering services is not enough - the services must result in technical knowledge being made available. But it held that the applicant had a permanent establishment under article 5(2)(k), its supervisory activity in connection with the project having continued more than six months, with employees present in India for 165 days in 2003-04 and 90 to 95 per cent of the work done here. The receipts were therefore taxable as business profits under article 7, but only so far as attributable to the permanent establishment.
• KnoWerX Education (India) P Ltd v DIT Advance RulingHelps taxpayer
  We collect examination fees in India for two American professional bodies and send the money on. Is that taxable here, and must we deduct tax before we remit?
  No. The Authority ruled that the examination fees collected for APICS and AST&L and remitted to them were not taxable in India, that the income was business income in nature, and that the applicant need neither deduct tax nor pay any. The fees were received in India by the applicant on the American bodies' behalf, so section 5(2)(a) was in play; but both bodies were residents of the United States for the agreement notwithstanding their exemption under section 501(c)(6) of the Internal Revenue Code, and the applicant was not their permanent establishment. With no permanent establishment, article 7 left the profits taxable only in the United States, and section 195 had nothing to bite on.
• In re Airports Authority of India (Raytheon contracts) Advance RulingCuts both waysSuperseded by amendment
  We send faulty equipment abroad for repair by a US supplier and separately pay it to maintain the software. Do we deduct tax on either, and at what rate?
  It depends on which contract. The Authority ruled that the payment to Raytheon for hardware repair support was not taxable in India and that the applicant was not required to deduct tax on it: the repairs were done outside India, delivery was taken outside India and Raytheon had no permanent establishment here, so article 7 left those business profits to the United States. The software maintenance contract went the other way. The deputation of an engineer created no permanent establishment, but the payments were fees for included services under article 12, the applicant having a conditional right to use the software rather than an outright purchase. Tax was to be withheld at 10 per cent apart from surcharge.
• In re Morgan Stanley and Co. Inc. Advance RulingCuts both waysPartly overruled — read this first
  Our Indian subsidiary does back-office work for us and we pay it cost plus a mark-up, and we send some of our own people over. Is the subsidiary our permanent establishment, and can the Revenue attribute anything more to us once the subsidiary has been paid an arm's length price?
  It depends on which limb. The Authority ruled that Morgan Stanley Advantage Services was not a fixed-place permanent establishment of Morgan Stanley & Co. Inc., because the US company did not carry on its business through MSAS's premises, and not an agency permanent establishment, because MSAS could not conclude contracts, held no stock and secured no orders. But it would be a service permanent establishment under article 5(2)(l) if employees were sent to India for more than 90 days, whether for stewardship or on deputation. On attribution, once MSAS was remunerated at arm's length no further income could be attributed to the permanent establishment. The ruling binds only that applicant.
• In re Gutal Trading Est Advance RulingCuts both waysSuperseded by amendment
  My UAE establishment wants an Indian liaison office to run seminars and pass enquiries back to Dubai. Will that be a business connection, and can I use the India-UAE treaty?
  It depends, and the answers split. The Authority ruled that the proposed liaison office would generate no income for the applicant and would not amount to a business connection in India under section 9(1)(i): it would only be a channel of communication, a cost centre reimbursed periodically, holding seminars, relaying enquiries to Dubai and passing product information to Indian customers, with no power to negotiate or conclude contracts or to collect payments. But it added a warning that enlarging the office's scope to negotiating imports or purchases by Indian customers would be a business connection. On the treaty the applicant lost: as a UAE individual establishment it could not claim the agreement.
• In re Morgan Stanley and Co. International Limited Advance RulingHelps taxpayerSuperseded by amendment
  We are a UK company registered as an FII, trading index and stock futures and options on Indian exchanges through brokers and custodians. Is that income taxable in India?
  No. The Authority ruled that the income derived by Morgan Stanley and Co. International Limited, a UK resident, from trading in exchange-traded derivative instruments in India would not be taxable in India under the India-UK agreement. It held first that income from derivative trading is business income and not capital gains, derivative contracts being excluded from the definition of capital asset. Business profits are taxable in India only through a permanent establishment, and the brokers, custodians and bankers the applicant used were independent agents acting for many clients in the ordinary course of their business, so no permanent establishment arose under article 5. The ruling binds only that applicant.
• In re Dun and Bradstreet Espana S.A. Advance RulingHelps taxpayerValidity unconfirmed
  We buy standardised business information reports from a Spanish company and resell them here. Do we have to withhold tax on what we pay, as royalty or technical fees?
  No. The Authority ruled that the payments made by Dun and Bradstreet Information Services India for electronic purchases of business information reports from its Spanish associate were the Spanish company's business profits within article 7 of the India-Spain agreement; that the Spanish company had no permanent establishment in India under article 5; that it was therefore not taxable in India on those profits; and that the Indian company was not required to withhold tax under section 195. Buying a finished report was likened to buying a book, not to acquiring intellectual property or a service. Three of the seven questions were not pressed. The ruling binds only that applicant.
• In re Fidelity Advisor Series VIII Advance RulingHelps taxpayerSuperseded by amendment
  Our US fund buys and sells Indian shares through local brokers and a custodian bank. Are our gains business profits or capital gains, and does the custodian give us a permanent establishment?
  Business profits, and no permanent establishment - so the fund won. The Authority ruled that the gains arising to Fidelity Advisor Series VIII from sales of its portfolio investments in India were its business profits covered by article 7 of the India-US convention, the shares and securities being held as business assets. It further ruled that the fund had no permanent establishment in India under article 5: it had no branch, office, employee or dependent agent here, and Standard Chartered Bank, its domestic custodian, was an independent agent within paragraph 5 of article 5. Without a permanent establishment the fund was not taxable in India under the convention. The ruling binds only that applicant.
• Brown and Root Inc v CIT Advance RulingHelps taxpayer
  Our US company laid a submarine pipeline offshore India as a subcontractor. The work took 39 days. Does that give us a permanent establishment under the India-US treaty?
  No. The Authority ruled that Brown and Root Inc, a US company, had no permanent establishment in India and so the revenue from its subcontract with Hyundai Heavy Industries was not taxable here. The work - installing a 12-inch submarine gas pipeline between offshore platforms using the vessels Subtec 1 and Captain BO - ran 39 days, from 30 November 1996 to 7 January 1997. Article 5(2)(k) of the India-US convention makes a construction or installation project or supervisory activity a permanent establishment only where it continues more than 120 days in any twelve months. Falling short of that, article 7 was not attracted. The ruling binds only that applicant.
• Horizontal Drilling International SA v CIT Advance RulingHelps taxpayer
  Our French company drilled a pipeline crossing under a river in India for a public sector customer. The whole job took three months. Can the Revenue tax the contract price as fees for technical services even though we have no permanent establishment?
  No. The Authority ruled that Horizontal Drilling International SA was not liable to Indian tax on the proceeds of its contract with GAIL. The job - laying gas pipeline under the Yamuna by horizontal drilling - ran about three months, well short of the six months that article 5(3) of the India-France agreement requires before a construction or installation project becomes a permanent establishment. Without a permanent establishment article 7 gave India nothing. The Authority refused to let the Revenue reach the same money through article 13 instead, holding that the price of executing a project is not consideration for services rendered while executing it. The ruling binds only that applicant.
• TVM Ltd v CIT Advance RulingHelps taxpayerSuperseded by amendment
  My Mauritius company sells advertising airtime on a channel beamed into India, and an Indian associate canvasses the advertisers and collects the money for us. Does that associate give us a permanent establishment here?
  No. The Authority ruled that TVM Ltd, a Mauritius company, had no permanent establishment in India, so its business profits from Indian advertising could not be taxed here. TVI, the Indian company soliciting the advertisements, was not an agent of independent status because it worked exclusively for TVM; but it was not a dependent-agent permanent establishment either, because under the solicitation agreement it had no authority to conclude contracts and final acceptance rested with TVM. The profits were deemed to accrue under section 9, but article 7 of the India-Mauritius treaty kept them outside the Indian net. The ruling binds only TVM.
• Tekniskil (Sendirian) Berhard v CIT Advance RulingHelps taxpayerSuperseded by amendment
  We are a Malaysian company that recruits skilled workers abroad and supplies them to a Korean contractor working offshore India. We are paid outside India and we supervise nothing. Are we taxable here?
  No. The Authority ruled that Tekniskil, a Malaysian manpower company, was not taxable in India on sums received abroad and had no permanent establishment here. It supplied about a hundred skilled workers to Hyundai Heavy Industries for offshore installation work at Bombay High. It recruited them outside India, bore their mobilisation and personal costs, and handed them over; HHI directed and supervised them on its own barges. Supplying labour was a business activity, so article 7 of the India-Malaysia agreement applied, and with no fixed place at Tekniskil's disposal there was nothing for the profits to attach to. The ruling binds only Tekniskil.
• In re Advance Ruling P. No. 13 of 1995 Advance RulingCuts both waysSuperseded by amendment
  Our French engineering group will build a turnkey plant in India, with some work done here and a great deal done abroad. Can India tax the work done abroad, and are the payments royalties, technical fees or business profits?
  Mostly against the applicant. The Authority ruled that the French company's Indian project headquarters and site office together were a permanent establishment; that the payments under the seven agreements were royalties and fees for technical services within articles 13.3 and 13.4 of the India-France agreement; and that the outside activities were effectively connected with that permanent establishment, so the receipts fell to be taxed under article 7 read with article 13.6 as business profits. Only profits referable to operations carried out in India were taxable. Payments to head office for licensed technology and subcontracted services were not deductible reimbursements. The ruling binds only that applicant.
• In re UAE Exchange Centre LLC Advance RulingHelps departmentOverruled
  Our UAE remittance house has Indian liaison offices that download remittance particulars and post cheques to the beneficiaries. Does that make us taxable in India?
  Yes, the Authority said so, but the decision did not survive. It ruled that income was deemed to accrue in India from the activities carried out by the liaison offices. It found a business connection under section 9(1)(i): a real and intimate relation between the remittance business carried on in the UAE and what the offices did here, contributing to the earning of income, with continuity. On the treaty it distinguished two modes. For telegraphic transfers the offices only handled complaints, which was auxiliary; but downloading the data, preparing the cheques and despatching them by courier was an important part of the main work itself, so those offices were a permanent establishment.

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.