No PE under DTAA if three criteria are not fulfilled
The assessee, a UK company, entered into an agreement with Jet Airways under which it agreed to provide Jet Airways with two segments of services, first, to carry out repairs and overhauling of aircraft components outside India and, second, to provide spares and components in the period the components were being repaired. To ensure that the spares and replacement components were readily available, the assessee maintained a stock of the components at the operating base of the airline in India. Though the stock was under the direct control of the assessee, it was in the possession of the airline as a bailee. The AO took the view that as the stock was kept in India with Jet Airways, Jet Airways constituted an “agent” and a “permanent establishment” in India under Article 5(4)(b) of the India-UK DTAA and that 10% of the receipts was liable to tax in India. This was upheld by the CIT (A). On appeal by the assessee, HELD allowing the appeal:
(i) In order for a PE to come into existence under Article 5(1) (“the basic rule”), three criteria have to be satisfied viz. (a) the physical criterion (existence of physical location) (b) subjective criterion (right to use that place) and (c) functional criterion (carrying on business through that place). It is only when the three conditions are satisfied that a PE under the basic rule can be said to have come into existence. The onus is on the Revenue to show that the assessee has a PE;
(ii) On facts, though the stock was stored at specific locations in India, such locations were not at the disposal of the assessee and the assessee could not carry out its business from that place. There was consequently no PE under Article 5(1). Further, even if there was a PE, the consideration relatable to the repairs done outside India was not taxable as it was not “attributable” to the PE. The existence of a PE does not justify taxation of all profits as one cannot infer the force of attraction principle. As regards the consideration for the right to use the components, the business element thereof is over when the component is handed over to the airline. There is no “carrying on of business” from that location. Consequently, there is no PE under article 5(1);
(iii) The argument of the Revenue that there is a “Dependent Agent PE” under Article 5(4)(b) is also not correct. The rationale of a Dependent Agent PE is that the foreign enterprise carries on business through a dependent agent, who is integrated into the principal’s business to a substantial extent. However, on facts, as Jet Airways was neither the dependent agent of the assessee and nor was the assessee carrying on business through Jet Airways, there was no PE under Article 5(4)(b);
(iv) When a PE exists, even such a consideration, which may otherwise be taxable in the source country under Article 13, is taxable on net basis under Article 7. Therefore, merely because an amount is not taxable under Article 7 in the source country, it is not end of the road so far taxability for that item in the source country is concerned. As evident from a plain reading of the consideration clause in the agreement between the parties, consideration for use of replacement components is distinct and separate and the same can perhaps be neatly segregated from the overall receipts. In this view of the matter, non taxability under Article 7 will still mean that application of Article 13 is to be considered and adjudicated upon. As the authorities had not examined whether the consideration for use of the replacement components was “for the use of industrial, commercial or scientific equipment” and taxable as “royalty” under Article 13(3)(b), the matter was remanded for that purpose.