becomes significant. A Permanent Establishment is a fixed place of business in India where the work is entirely or partially carried out by a foreign entity.
In a recent case for German construction company, Pintsch Bamag, the AAR (Authority of Advance Rulings) concluded that the work done by an Indian subcontractor in its warehouse independently does not make it a PE of Pinstch Bamag.
The facts of the case were that Pintsch was awarded a contract by Tuticorin Port Trust for design, fabrication, supply, installation and maintenance of a navigational channel and fairway buoys for the Sethu Samudram Ship Channel Project. Pintsch sub-contracted a major portion of its work to a Delhi based company, Asia Navigation Aids as well as entered into supply contracts with Indian suppliers.
Pintsch’s work performed was inter alia technical analysis for the execution of contract; equipment, designing of fairway buoys, mooring gears, solar-operated navigational equipment and supply of critical components; and supervision by two of its engineers for installation of equipment in India. Two of the three tasks were carried out in Germany and the third in India by the engineers of Pintsch for a period of 2 months only.
The Revenue Authorities had held that Pintsch had a PE as it did all its manufacturing work through Asia Navigation Aids and as such Asia Navigation Aids was a nominee of Pintsch.This was contended by Pintsch, that the critical issue was whether the work place set up by the sub-contractor (Asia Navigation Aids) to carry out the works entrusted to it by Pintsch can be treated as the work place and the permanent establishment of Pintsch.
Pintsch also contended that it did not fall within the ambit of PE provision contained in Article 5(2) (i), which reads as follows:
(i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months.
Further AAR raised the issue of whether the fact that the sub-contractor (Asia Navigation Aids) did the work in India transforms the sub-contractor’s workshop into the PE of Pintsch.The AAR held that it was not possible to hold that the place of manufacture of Asia Navigation Aids situated far away from the installation site as part of Pintsch’s PE. Hence, with no PE in India and that the time frame required by the Pintsch’s Engineers to be in India was within the stipulated period (the task was completed in two months and the deadline was six months), it was concluded that Pinstch should not be levied taxes.
The AAR also took into account the fact that the working relationship between the Pinstch and the Indian subcontractor was similar in principles, rather than an employer and his agent/subcontractor. This is probably highlighted by the fact that the contract contemplated the employment of a sub-contractor and the contract itself draws the distinction between local agents of Pintsch and the sub-contractor, it was pointed out that the dealings between Pintsch and the sub-contractor were that of principal to principal and they were dealing with each other at arms-length. Therefore, the ruling, issued by the AAR, in this case, brings great relief to the foreign contractor.