The Hindu Business Line : Changing concept of PE

In the recent Golf in Dubai case, the AAR ruled that on the basis of solitary or isolated activity during the year, it is difficult to infer the existence of permanent establishment.

A birdie for event managers.

T. C. A. Ramanujam

India has Double Taxation Avoidance Agreements (DTAAs) with more than ninety countries. Liability to tax in respect of Indian income accruing or arising to a non-resident is governed by Section 90 and 91 of the Income Tax Act,1961.

A crucial requirement for fastening liability is the existence of a permanent establishment (PE) for the non-resident in India. The term ‘PE’ is defined in the OECD commentary as a place of business. It must be fixed. Business must be carried on through this fixed place of business. Normally, the DTAA gives a specific definition of PE as a fixed place of business through which the business of the enterprise is wholly or partly carried on. It includes a place of management, branch office, factory, workshop, etc.

Some agreements stipulate that furnishing of services by an enterprise through employees can also mean a PE, provided such activities continue for the same project or connected project for a period exceeding nine months.

PE however will not include use of storage facilities, maintenance of stock of goods belonging to the enterprise for processing or display and maintenance of fixed place of business merely for purchase of goods or for collecting information.

It will also not include maintenance of fixed place of business solely for carrying on any other activity of a preparatory or auxiliary character for the foreign enterprise.

The foreign enterprise can be deemed to have an agency PE when there is a person habitually exercising authority to act on behalf of the foreign enterprise in India. A broker or commission agent acting in the ordinary course of business will not constitute a PE.

Recent judgments make it appear that it is easier to define what a PE is not, rather than specify what a PE is.

The Golf case

Golf in Dubai (GID), a company registered in the UAE, is engaged in the business of promoting golf by way of organising golf tournaments in different countries. It is an event organiser having affiliation with the European professional Golf Association. Top ranking international golf players participate in the tournaments organised by the GID, lending recognition and prestige to the events.

GID organised two golf tournaments in Bangalore and Delhi in 2007-08 under the auspices of the Delhi Golf Club. The tournaments were organised by hiring independent third party local contractors and suppliers with expertise and experience. GID proposes to organise more such events to popularise Golf in India and abroad.

The Indian sponsors gave GID sponsorship fee representing reimbursement of expenses on prize money, management fee and income from sale of merchandise at the venue and over the Internet. The question arose whether GID can be deemed to have a PE in India in terms of Article 5 of the DTAA between India and the UAE.

Can the Delhi Golf Club be deemed to be an agency PE of GID since the tournaments were held in the grounds of the Club and the Club provided assistance? If the GID does not have a PE in India, can the income arising to the GID be taxable in India?

AAR ruling

The Authority for Advanced Ruling (AAR) considered the question of PE from various angles. The concept of ‘furnishing of services’ postulates the existence of two parties, a provider of services and a recipient of services. GID is a mere organiser of an event. Assuming it is a service provider, the question arises: Who is the recipient of these services? There is no recipient of services in this case. The employees or other personnel of GID did not stay in India for more than nine months; there cannot therefore be any question of a service PE.

Nor is there an agency PE. Independent third party local contractors were acting in ordinary course of their business and were not devoted wholly to the applicant. Agency PE is ruled out.

The general definition of PE presupposes existence of a fixed place of business through which business is carried on. This signifies a course of conduct involving the performance of a succession of acts and not the effecting of one solitary event.

On the basis of solitary or isolated activity during the year, it is difficult to infer the existence of PE. There is no regularity, continuity and repetitiveness to signify ‘carrying on’ business through a fixed place in India.

The agreement between the GID and the Delhi Golf Club did not stipulate that the events were to be repeated in future also at regular intervals at the same venue. Thus, there was no PE for GID in India in terms of the DTAA and the business income accruing by organising the events in Delhi and Bangalore cannot be taxed in India (219 CTR 513).

The Ruling was delivered in October 2008. It will come in handy for events managers organising cricket, tennis and football with international players on the scene.

(The author is a former Chief Commissioner of Income-Tax. blfeedback@thehindu.co.in)

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