A recent decision of the Bengaluru Bench of the Income-tax Appellate Tribunal (Tribunal) in the case of: ABB FZ-LLC v. DCIT [ITA(TP) No. 1103/Bang/2013, assessed the India-UAE (United Arab Emirates) Double Taxation Avoidance Agreement (tax treaty) and held that the taxpayer had a Service Permanent Establishment (PE) in India since the taxpayer has been furnishing services to the Indian company even without any physical presence of its employees in India.

With current technology services, information, consultancy, management, etc. can be provided through various virtual modes such as email, the internet, video conferencing, remote monitoring, remote access to the desktop, etc. Under the tax treaty provision for a “Service PE” the relevant factor is not the presence of the employees in the other State for more than nine months, but the rendering of services or activities which are required to be rendered for a period of nine months to create a PE. The Service PE is not dependent upon a fixed place of business as it is only dependent upon the continuation of the activity. As a result, the ruling was in favour of the Indian Revenue Service and the Tribunal held that the consideration for providing services is taxable in India.

The Tribunal also considered the services provided by the taxpayer in the form of parts or permissions for the use of the particular knowledge, knowledge and experience of the taxpayer and the term “license fees” under Article 12 (3) of the tax treaty. Visits of the taxpayer’s officials were only for the purpose of providing access to the use of the information on the industrial/commercial / scientific experience and to help commercial use. The dominant feature of the agreement between the taxpayer and the Indian company was to provide secret and confidential intellectual property rights (IPR) information. The tribunal noted that the tax treaty clearly uses the word for the “use of” or “right to use”, commercial, scientific equipment and has not used the word either “mediation” or “alienation” of expertise. The language used in the tax treaty is clear and unambiguous and therefore the reading of words “alienation” or “mediation” of know-how in the tax revenue is not permitted.