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which the business of an enterprise is wholly or partly carried on — was not satisfied regarding the backoffice activities. Moreover, the Court considered that the back-office services to be provided by MSAS fall under article 5(3)(e) of the India-U.S. treaty, which excludes the characterization of a PE regarding ‘‘the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.’’ 77 Concerning the existence of an agency PE, the Supreme Court of India concluded that there was no PE because MSAS did not have authority to enter into or conclude contracts (which were entered and concluded in the United States). 78 Moreover, regarding the stewards seconded by MSCo to work in India as employees of MSAS, the Supreme Court of India disagreed with the ruling provided by the AAR and held that their activity did not lead to the constitution of a PE within the meaning of article 5(2)(l) of the India-U.S. treaty. According to the Court, the stewardship activities did not constitute a service provided by MSCo to MSAS, rather, ‘‘MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services.’’ 79 The underlying idea is that the enterprise must provide a service to a third party to qualify as a PE — a PE does not arise when the enterprise is providing a service to itself. Under the Court’s view, as no service was being provided to a third party by the stewards, no PE was found to exist. However, regarding the deputationists deployed by MSCo to work in India as employees of MSAS, the Supreme Court of India held that they did not become employee of MSAS; they retained their employment lien with MSCo and therefore constituted a service PE in the sense of article 5(2)(l) of the India-U.S. treaty. The Court found that MSAS was therefore a service PE in India regarding the services performed by the deputationists deployed by MSCo. 80 Once the Supreme Court of India concluded that MSCo had a service PE in India, the question was how much profit could be attributed to that PE. The Court first made reference to the ruling provided in the AAR that when the nonresident compensates a PE at arm’s length no further profits could be attributable to India. Then the judges presented their agreement with this ruling: 77 Id. at 15, 16, and 18. 78 Id. at 16. 79 Id. at 20-21. 80 Id. at 21-22. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm’s length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. 81 The widespread interpretation of this case law supports that it is in line with the single taxpayer approach since it provides that no further profit is left to be attributed to the PE once the dependent agent has received an arm’s-length reward for the service provided. Nevertheless, there is a dissenting view headed by Hans Pijl (and shared by me) that considers this decision as favoring the authorized OECD approach. 82 Indeed, a careful reading of the decision’s reasoning reveals that the Supreme Court of India left open the possibility of a further profit attribution to the PE as long as there are other functions performed or risks assumed by the enterprise that are not reflected in the dependent agent remuneration. This conclusion results from the final part of the decision: ‘‘The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered.’’ 83 (Emphasis added.) This is clearly in line with, if not a definition of, the authorized OECD approach. It can be derived from the decision that no further profit was attributed to the PE in India precisely because no other functions or risks were identified in the framework of the activities carried out by that PE, not because the Supreme Court of India opted as a matter of principle for the single taxpayer approach. It is interesting that this decision is always promoted as being one of the most important precedents in favor of the single taxpayer approach when it really invalidates it. All the conflicting views presented above result from the confusing wording of the decision in its concluding section. Although the wording of the decision is somewhat ambiguous, I feel it safe to conclude that this is a 81 Id. at 46. SPECIAL REPORTS 82 Hans Pijl, ‘‘Morgan Stanley: Issues Regarding Permanent Establishments and Profit Attribution in Light of the OECD View,’’ Bull. for Int’lTax’n (May 2008), pp. 174-182. 83 Supreme Court of India, July 9, 2007, decision 2114/07 and 2415/07, p. 46. TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 437 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
SPECIAL REPORTS Singapore India precedent in favor of the authorized OECD approach, rather than the single taxpayer approach as it might look at first sight. F. SET Satellite SET Satellite involves a Singaporean broadcasting company named SET Satellite (Singapore) Pte. Ltd. that was engaged in the business of marketing and distributing satellite television channels in India. 84 SET Satellite appointed SET India Pvt as its agent in India, whose activity mainly comprised marketing airtime slots to various advertisers in India on behalf of SET Satellite, as illustrated in Figure 8. When filing its tax returns, SET Satellite assumed the position that it was not subject to tax in India because it did not have a PE within the meaning of article 5(8) of the India-Singapore tax treaty. For the sake of clarity, the provisions of article 5(8) of the treaty deviate from the wording of the OECD model convention by enlarging the notion of agency PE to other activities, such as: • maintenance of stock of goods or merchandise to be delivered on behalf of the enterprise; or • habitually securing orders wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise. However, the India-Singapore treaty provides for the essential features of the typical concept of agency PEs as established in the OECD model: (i) a person (individuals or companies) acting on behalf of the enterprise, (ii) other than an agent of independent status, 84 Indian Income Tax Appellate Tribunal, Apr. 20, 2007, decision 535/Mum/04 and 205/Mum/04. As both appeals pertained to the same person, involved interconnected issues, and were heard together, the tribunal disposed of both appeals in a consolidated order. Figure 8. SET Satellite SET Satellite Arm’s-length remuneration for marketing services SET India (iii) with authority to conclude contracts, (iv) in the name of the enterprise, (v) on a regular basis. Different from the OECD model, the India-Singapore treaty does not require that the dependent agent concludes contracts ‘‘in the name of the enterprise,’’ but ‘‘on behalf of the enterprise.’’ In my opinion, however, this difference does not lead to major consequences because, as explained above regarding the Zimmer case, one should not rely on an extreme formalistic approach to limit the application of article 5(5) of the OECD model convention to agents that enter into contracts literally in the name of the enterprise, as such provisions apply equally to agents that conclude binding contracts that are not actually in the name of the enterprise. For the sake of clarity, a full look at the relevant provisions of the India-Singapore treaty is necessary. (See Table 2.) According to the court, there was no dispute about whether SET Satellite had a dependent agent in India. The issue was whether once the dependent agent (SET India) was paid an arm’s-length remuneration for the services rendered to its principal (SET Satellite), any further income, other than the income earned by the dependent agent, can be said to be attributed to the dependent agent PE and therefore subject to tax in India. 85 Indian tax authorities argued that: • though the purchase and sale of airtime are effected in Singapore, the receipt regarding broadcasting advertisement is in the territory of India; • the income regarding, or in connection with the relay of, advertisements, accrues in India; and • SET Satellite has a PE in India in the form of SET India, and therefore, advertisement revenue from AXN channel is taxable in India as business income. 85 Id. at paras. 6 and 31. Marketing services in the Indian market 438 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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