DTAA: Service PE vs Agency PE : Saudi Arabia - India

Query : Based on the nature of business support/ marketing support activities proposed to be undertaken by the Indian affiliate entity viz. Aramco Asia India Private Limited (hereinafter “Aramco India”), as listed in the Statement of relevant facts (Annexure III), would Aramco India create a Permanent Establishment (“PE”) for the Applicant in India under Article 5 of Double Taxation Avoidance Agreement between India and Kingdom of Saudi Arabia (hereinafter “India-Saudi Arabia DTAA”), where such activities of Aramco India are duly compensated on an Arm’s Length basis in accordance with the Indian transfer pricing laws and regulations?

Reply: Based on the nature of business support / marketing support activities proposed to be undertaken by the Indian affiliate entity viz. Aramco Asia India Private Limited (Aramco India), as listed in the Statement of relevant facts (Annexure III) Aramco India would not create a Permanent Establishment (PE) for the Applicant in India under Article 5 of Double Taxation Avoidance Agreement between India and Kingdom of Saudi Arabia, where such activities of Aramco India are duly compensated on an Arm’s Length basis in accordance with the Indian transfer pricing laws and regulations

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Saudi Aramco is making offshore crude oil sales to Indian refineries like HPCL- Mittal Energy Limited, Hindustan Petroleum Corporation Limited etc., from outside India such that the title to such crude oil passes to customers outside India on a Free on Board (‘FOB’) basis; and payment is received by Saudi Aramco in a designated bank account outside India. All crude oil sales are completed by Saudi Aramco from outside India and it does not have any office in India.

To expand its India operations and for having a long term presence, Saudi  Aramco has established a Subsidiary company in India viz.  Aramco Asia India Private Limited (Aramco India), incorporated and registered under the Indian Companies Act, in 2013. Though the primary object of the new entity is to provide procurement support services, it would also create awareness about Aramco and Saudi Arabian crude oil amongst crude buyers and refineries in India.

The Applicant proposes to set up a support team in Aramco India which will closely coordinate and extend required support to Saudi Aramco’s Crude Oil Sales and Marketing Department (COSMD) for providing business support/marketing support function. However, it is mentioned that with regard to the negotiation of the material terms or conclusion of contracts with Indian customers as well as signing of such contracts for or and on behalf of Saudi Aramco, such activities will only be carried out by Saudi Aramco’s own employees based in Saudi Arabia. Aramco India, however, will only provide certain support in furtherance of the above sales operations. It will be helping in strategic sourcing and registration of major Indian oil and gas equipment manufactures and engineering procurement and construction (EPC) contractors, performing engineering and inspection evaluations, and plant audits for identified manufacturers and suppliers. It will also be supporting Saudi Aramco and other group companies with any additional material supply support.

 In the E-Funds judgment, 86 taxmann.com 240 (SC), a Service PE cannot be said to exist unless the foreign enterprise renders services in India through its employees to the customers of the foreign enterprise. In the instant case, the Applicant is only receiving services and not rendering any services. In any event, the Director of Aramco India who resides in Beijing is not an employee of the Applicant, and this Director cannot be said to be rendering any services to any customer of the Applicant in India. Hence, no Service or Agency PE can possibly be said to exist in the present case. Similar is the position with regard to the other Directors.

Fixed Place PE 

This is covered by Article 5(1) of the DTAA, and there are three requirements which have to be conjunctively established in order that a Fixed Place PE can exist. Firstly, there must be a specific identifiable fixed place of business in India; secondly, that fixed place must be put at the disposal of the foreign enterprise; and thirdly, the foreign enterprise must carry on its main business activity through that fixed place of business. Reference in this regard has been made to the decisions of the Hon’ble Supreme Court of India, in the Formula One case, 394 ITR 80 (SC), and also in the E-Funds case, 86 taxmann.com 240 (SC).

It is stated that even where such purchase contracts were to be concluded by Aramco India, it will still not result in creation of a PE as the “orders” referred to in Article 5(5)(c) are sales orders for the sale of the products of the foreign enterprise and not purchase orders for goods purchased by it for its internal operations.

In this connection, reliance was placed by the Applicant on the following judicial precedents to say that the proposed business support / marketing support activities would not result into constitution of Agency PE in terms of Article 5(5) of the DTAA: DDIT vs B4U International Holdings Ltd. (ITA No. 880/Mum/2005) (Mumbai ITAT) and upheld by the Bombay HC (2015) 374 ITR 453 (Bom); e-Bay International AG v ADIT (ITA No. 6784/M/2010) (Mumbai ITAT); and DDIT vs Daimler Chrysler A.G. (ITA No. 9211/Mum/2004) (Mumbai ITAT).

Supreme Court's view - Service PE

In Vodafone Holdings International, BV, 341 ITR 1 (2012), the Hon’ble Supreme Court had observed as under: 
 

 “66. The approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the above mentioned separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies and other entities subject to income-tax. Companies and other entities are viewed as economic entities with legal independence vis-a-vis their shareholders/participants. It is fairly well accepted that a subsidiary and its parent are totally distinct tax payers. Consequently, the entities subject to income-tax are taxed on profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders/ participants……….

Now a days, it is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct tax payers.

67. It is generally accepted that the group parent company is involved in giving principal guidance to group companies by providing general policy guidelines to group subsidiaries.

However, the fact that a parent company exercises shareholder's influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Further, if a company is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end. This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a restriction, which is the inevitable consequence of any group structure, is generally accepted, both in corporate and tax laws.

In the case Formula One World Championships (supra). Para 27 of this decision reads as under: 
“27. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be ‘at the disposal’ of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as ‘at the disposal’ of the enterprise when the enterprise has right to use the said place and has control thereupon.”

E-Funds (supra), the Hon’ble Supreme Court said at para 16, as under:  

“16. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score."

Supreme Court's view - Agency PE

In the Morgan Stanley case, Supreme Court explained as under:

 “9. Lastly, as rightly held by the AAR there is no agency PE as the PE in India had no authority to enter into or conclude the contracts. The contracts would be entered in the United States. They would be concluded in US. The implementation of those contracts is only to the extent of back office functions that would be carried out in India, and therefore, MSAS would not constitute an Agency PE as contended on behalf of the Department.”

In the case of E-Funds (86 taxmann.com 240), the Hon’ble Supreme Court explained as under (para 21, Pg. 52):

“21. …However, for the sake of completeness, it is only necessary to agree with the High Court, that it has never been the case of Revenue that e-Funds India was authorized to or exercised any authority to conclude contracts on behalf of the US company, nor was any factual foundation laid to attract any of the said clauses contained in Article 5(4) of the DTAA. This aspect of the case, therefore, need not detain us any further.”

Ratio

In the above analysis we are caught in between two situations. On the one hand are the specific provisions of the DTAA, the clauses in the Agreements, such as Clause 5 of the Services Agreement and Clauses 3 and 4 of the Proposed Addendum, which prohibit Aramco India from doing activities that are clearly in the domain of the Applicant, such as concluding contracts or obtaining orders, and exclude all such acts that may render Aramco India a PE of the Applicant. On the other hand we have the wordings used in the different services enumerated in the two agreements, which lend themselves to varied interpretation, in the absence of material facts. However, the above discussion shows that in view of the clear exclusions and prohibitions incorporated in the two agreements, as they presently stand, Aramco India would not be rendering services or doing such acts as can deem it to be a PE of the Applicant, under Article 5 of the India Saudi Arabia DTAA.