Recently, the Chennai Bench of the Income Tax Appellate Tribunal (the Tribunal) in the case of: Carpi Tech SA v. ADIT (ITA No 1742/Mds/2011), held that the amount received by the taxpayer pursuant to NHPC project was taxable in India since the taxpayer’s subsidiary in India represented by its managing director constitutes a fixed place Permanent Establishment (PE) in India.
According to the case, the Tribunal has decided that fixed place test is a positive one and there was no requirement to go for special inclusion for the purpose of determination of PE. The issue with respect to the constitution of a PE under Article 5(2) of the tax treaty independent of Article 5(1) has been a matter of debate before the courts.
The Delhi High Court in the case of National Petroleum Construction Company observed that Article 5(1) and 5(2) of the tax treaty complement each other. Thus, all classes of PEs as specified in Article 5(2) of the tax treaty can be construed as a PE subject to the essential conditions of Article 5(1) of the tax treaty being fulfilled.
The type and the nature of activities of the taxpayer is a matter of fact and play an important role in determining whether such services constitute a PE or not. The Tribunal, in the instant case, based on the nature of activities, held that the activities carried on by the taxpayer were in the nature of repairs and thus, would not qualify for the six months threshold as is applicable to construction, installation and assembly projects under the tax treaty.
