Tax Alert | Delivering clarity - 25 August 2021 - Deloitte
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Tax Alert | Delivering clarity
25 August 2021
Inter-related services rendered for same project, under unified agreement, constituted
permanent establishment
The Delhi Bench of the Income-tax Appellate Tribunal has rendered its decision that, based on
the unified agreement, consolidated billing pattern and the inter-relation amongst the activities,
the activities / services of the taxpayer constituted a permanent establishment in India.
Background:
• The taxpayer1, a tax resident of Norway, entered into a Business Service Agreement (BSA) with an
Indian company (I Co) dated 10 August 2010, effective from 1 April 2009.
• As per the BSA, the taxpayer provided services to the I Co and its group entities under independent
Service Order Forms (SOFs) involving various activities such as:
─ SOF 1: Sourcing Activities [viz. preparation, execution and negotiation of second round of Global
System for Mobile Communication (GSM) awards, IT outsourcing contract, etc.].
─ SOF 2: Market activities (viz. Device strategy development, product development, etc.).
─ SOF 3: IT / IS Activities (viz. IS / IT Solution, architecture and business scoping, Service Delivery
platform solution and architecture, etc.).
─ SOF 4: Network and IS / IT Activities (viz. Benchmarking / project support for IT outsourcing project;
commercial workstream; etc.).
─ SOF 5: Project Officer Activities (viz. Support and assist in completing contracts for GSM network
and IT support systems, etc.)
─ SOF 6: On-board and training project support [viz. advisor to local Human Resources (HR)
personnel, induction day; Way book ordering and distribution; etc.].
─ SOF 8: Planning / strategy workshop on regulatory and carrier issues (viz. Time and travel cost for
preparation and participation in workshop on strategy for various carrier and regulatory issues).
─ SOF 13: Security Support; Information security support.
─ SOF 18: HR Activities (viz. Bonus Compensation).
• During the Financial Year (FY) 2009-10 relevant to Assessment Year (AY) 2010-11, the taxpayer offered
the income from providing the services as ‘fees for technical services’ (FTS) under Article 122 of the
India-Norway tax treaty and offered the income to tax @ 10% on gross basis.
1Telenor ASA vs. DCIT, International taxation, New Delhi (ITA No. 1307/Del/2015) (Delhi-Trib)
2Theruling seems to have inadvertently mentioned Article 13 (Capital gains) instead of Article 12 (Royalties and FTS) of the India-
Norway tax treaty
©2021 Deloitte Touche Tohmatsu India LLP• During the course of the audit proceedings, the Assessing Officer (AO) held that the taxpayer had a
Permanent Establishment (PE) in India on the following basis:
─ Taxpayer’s employees stayed in India for a period of 260 days, which exceeded the threshold
provided under Article 5(2) of the India-Norway tax treaty.
─ The consultancy services rendered by various employees were for the same project, as the SOFs
were in accordance with the BSA and were governed by the provisions of the said BSA.
─ The SOFs were in the nature of job orders where the activities to be performed, their details and
persons rendering such services were mentioned and the clauses of SOFs bound it to the BSA
between the parties.
─ The arrangement of rendering services and payment of fees were made in accordance with
paragraph 3 read with paragraph 4 of the BSA.
─ Accordingly, the SOFs were not separate agreements.
─ Fees received from I Co, which was in the nature of FTS was effectively connected with the PE of
the taxpayer and in terms of Article 12(5) of the India-Norway tax treaty, taxpayer’s income was
liable to be taxed under Article 7 of the India-Norway tax treaty read with section 44DA of the
Income-tax Act, 1961 (ITA).
• Accordingly, the AO passed a draft assessment order and, amongst others, held that the taxpayer had a
PE in India in terms of Article 5(2)(1) of the India-Norway tax treaty.
• Aggrieved, the taxpayer filed its objections with the Dispute Resolution Panel (DRP). The DRP rejected
the objections and concluded that taxpayer had a PE in India based on the billings scheme showing
consolidated invoices and various SOFs had been operated as a single project.
• Aggrieved, the taxpayer filed an appeal before Delhi Bench of the Income-tax Appellate Tribunal (ITAT).
• The key contentions of the taxpayer before the ITAT were as follows:
─ The words ‘same’ or ‘connected’ under Article 5(2)(1) of the India-Norway tax treaty was to be
interpreted from the perspective of the service provider.
─ The duration of stay of employees in India during the FY 2009-10, with respect to the various
projects undertaken, which were independent of each other, did not exceed six months per project.
─ The various SOFs constituted separate projects and the activities could not be considered as single
consolidated activities.
─ There were different services like marketing and sourcing activities which were undertaken by
different departments and could not be clubbed together as an integrated project but had to be
treated as separate and independent activities.
─ The performance of services rendered under an SOF was not dependent or linked with
performance of services under other SOFs in any manner. There was no interconnection or
interlacing with other SOFs.
©2021 Deloitte Touche Tohmatsu India LLP─ The SOFs formed integral part of the BSA but constituted separate and independent projects, which
were merely governed by uniform terms and conditions agreed between the parties. With respect
to common invoices, each invoice was duly supported by a detailed back-up working clearly
specifying (a) time cost of personnel, and (b) travelling expenses incurred by the taxpayer as per
each SOF separately. The said comprehensive details of cost incurred by the taxpayer under each
SOF further demonstrated the distinct nature of SOFs.
─ Each requisition by way of issuance of separate SOF had no commercial or geographical coherence
with the other SOF issued by the I Co, therefore, the period of stay of taxpayer’s employees under
different and separate SOFs could not be aggregated to determine the period of stay for the
purposes of Article 5(2)(1) of the India-Norway tax treaty.
Relevant provisions in brief:
Extract of the relevant portion of Article 5 of the India-Norway tax treaty:
Article 5: PERMANENT ESTABLISHMENT –
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of
business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" also encompasses:
……………. .
(b) the furnishing of services, including consultancy services, by an enterprise through employees or
other personnel engaged by the enterprise for such purpose, but only where activities of that nature
continue (for the same or a connected project) within the country for a period or periods aggregating to
more than six months within any 12-months period.
Decision of the Delhi ITAT:
The Delhi ITAT observed/noted as follows:
• The BSA defined the mutual obligations and implementation. There was no other inter-se agreement
with any of the parties or among the parties. This gave rise to a conclusion that the BSA was a single
unified agreement. Based on the clauses of the BSA, no single clause gave it a shape of multiple
agreements.
• The bills were raised on quarterly basis, consolidated invoices were raised irrespective of the SOFs
under which the services were rendered. The common billing by the recipient and the common
payments gave rise to a conclusion that it was one single contract.
• The Organisation for Economic Co-operation and Development (OECD) model commentary with regard
to the PE Article 5 and in reference to an "enterprise", commented as follows:
“The reference to an “enterprise.... performing these services for the same project’’ should be
interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may
have two different projects to provide services to a single customer (e.g. to provide tax advice and to
©2021 Deloitte Touche Tohmatsu India LLPprovide training in an area unrelated to tax) and whilst these may be related to a single project of the
customer, one should not consider that the services are performed for the same project.”
• With reference to "connected projects" the OECD model commentary commented as follows:
“The reference to ‘connected projects’ is intended to cover cases where the services are provided in the
context of separate projects carried on by an enterprise, but these projects have a commercial
coherence. The determination of whether projects are connected will depend on the facts and
circumstances of each case but factors that would generally be relevant for that purpose include:
─ Whether the projects are covered by a single master contract;
─ Where the projects are covered by different contracts, whether these different contracts were
concluded with the same person or with related persons and whether the conclusion of the
additional contracts would reasonable have been expected when concluding the first contract;
─ Whether the nature of the work involved under the different projects is the same;
─ Whether the same individuals are performing the services under the different projects.
Sub-paragraph b) requires that during the relevant periods, the enterprise is performing services
through individuals who are performing such services in that other State. For that purpose, a period
during which individuals are performing services means a period during which the services are actually
provided, which would normally correspond to the working days of these individuals. An enterprise that
agrees to keep personnel available in case a client needs the services of such personnel and charges the
client standby charges for making such personnel available is performing services through the relevant
individuals even though they are idle during the working days when they remain available”
• The activities of the taxpayer with regard to the recipient of services could be said to be inter-
connected, inter-laced and sequential technical services. Further, it could not be said that they were
unrelated to each other as none of the activity could stand in isolation to each other and no single
activity could give rise to performance and achieving the purpose of the recipient.
• The activities started with preparation, execution and negotiation of the GSM to devising the strategy
development, preparation of IT solutions architect, benchmarking the same, recruiting the manpower
for the purpose of implementation and training them for various activities in relation to GSM role out to
customers. It was a clear commercial coherence between the said activity as no single activity
mentioned above did not serve any purpose individually, when segregated. All these activities were
different facet of one seamless function.
• The project as defined in the Article 5(2)(1) of the India-Norway tax treaty consisted of bundle of inter-
connected and inter-related services with the underlying theme of completion of projects.
• In the instant case, the implementation of one SOF lead to the other and it could be observed that they
were well integrated, the outcome of one SOF became the inputs for the other SOF.
Based on the unified agreement (BSA), consolidated billing pattern and the inter-relation amongst the
activities, the existence of PE of the taxpayer was undeniable.
©2021 Deloitte Touche Tohmatsu India LLPSeparately, with respect to attribution of profits, the ITAT concurred with taxpayer’s contention that
revenues raised out of the services rendered from Norway could not be attributed to taxpayer’s PE in India.
Accordingly, the ITAT remanded the issue relating to determination of profits back to the AO.
Comment:
Constitution of a PE or otherwise is a combination of factual and legal analysis.
This ruling based on facts (including the consolidated billing pattern) has held that various services
rendered by the taxpayer under one unified agreement were inter-related and inter-connected (though
rendered by different departments/employees) and thus, constituted a PE of the taxpayer in India.
Taxpayers may want to evaluate the impact of this ruling to the specific facts of their cases.
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