SERVICE PE
AKIL HIRANI
Managing Partner
MAJMUDAR & CO.
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96 Free Press House, Free Press Journal Road, Nariman Point,
Mumbai-21, INDIA
Tel: +91 22 6630-7272, Fax: +91 22 6630-7252
Other offices: Bangalore, New Delhi, Chennai and Hyderabad
E-mail: mailbox@majmudarindia.com
www.majmudarindia.com
Synopsis

Service PE under the OECD Model Tax
Convention and the UN Model Tax Convention

Service PE under DTAAs between India and
other countries

When is a service PE deemed to be
concluded?
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Service PE under the OECD Model Tax
Convention and UN Model Convention

OECD Model Tax Convention – No specific provision
for service PE

UN Model Convention – Does not use the expression
“service PE” – Article 5(3)(b) of the UN Model
Convention reads as follows:
The furnishing of services, including consultancy
services, by an enterprise through employees or other
personnel engaged by the enterprise for such
purpose, but only if activities of that nature continues
(for the same or a connected project) within the
country for a period or periods aggregating more than
six (6) months within any twelve (12) month period.
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Service PE under the OECD Model Tax
Convention and UN Model Convention
(contd.)

Rationale of Service PE Clause – to tax the
enterprise of the home country for its
economic activities in the host country
beyond a threshold limit

No Clause on ‘fees for technical services’ in
the UN Model Convention
Service PE in DTAAs between
India and other countries

Service PE is included in the DTAAs between India
and the following countries:
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Australia – Article 5(3)
Canada – Article 5(2)(l)
China – Article 5(2)(k)
United States of America – Article 5(2)(l)
United Kingdom – Article 5(2)(k)
Switzerland – Article 5(2)(l)
Singapore – Article 5(6)
Norway – Article 5(2)(l)
Indonesia – Article 5(5)
Nepal – Article 5(2)(h)
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Requirements to establish service PE

Services to be rendered by the employees or “other
personnel” engaged by the enterprise for a specified
period within the host state

“other personnel” – generally does not include non-
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individuals – no clarity in the UN and OECD
commentaries
DTAA between UK and Singapore – service PE is
triggered if services rendered through a non-person,
for e.g., a company
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Requirements to establish service PE
(contd.)

Time period
Country
Services provided to a
non-related enterprise
Services provided to a
related enterprise
Australia
More than ninety (90) days
within any twelve (12)
month period
One (1) day
Canada
More than ninety (90) days
within any twelve (12)
month period
One (1) day
Singapore
more than ninety (90) days
within any fiscal year
More than thirty (30)
days in a fiscal year
China
More than one hundred
and eighty-three (183) days
Not provided
Norway
Six (6) months within any
twelve (12) month period
Not provided
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Requirements to establish service PE
(contd.)
Country
Services provided to a nonrelated enterprise
Services provided to a
related enterprise
Swiss Confederation
More than ninety (90) days in
any twelve (12) month period
More than thirty (30)
days in a twelve (12)
month period
United Kingdom
More than ninety (90) days in
a twelve (12) month period
More than thirty (30)
days in a twelve (12)
month period
United States of
America
More than ninety (90) days in
a twelve (12) month period
One (1) day
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Requirements to establish service PE
(contd.)
Country
Services provided to a nonrelated enterprise
Services provided to a
related enterprise
Nepal
more than one hundred and
eighty-three (183) days in any
Not provided
twelve month period
Thailand
period or periods aggregating to
more than one hundred and
eighty-three (183) days
Not provided
Sri Lanka
period or periods aggregating to
more than one hundred and
eighty-three (183) days
Not provided
Indonesia
more than ninety-one (91) days
in any twelve (12) month period
Not provided
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Other issues
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Definition of a “month” – Section
3(35) – General Clauses Act, 1897
– as per British calendar
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Not a problem as most DTAAs give
exact number of days
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Requirements to establish service PE (contd.)
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Nature of services
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UN Model Convention – uses the term “furnishing of
services, including consultancy services.”
“furnishing services, including managerial services” –
used in the DTAAs signed by India with Australia and
United Kingdom
“furnishing of services” – used in the DTAAs signed by
India with China, Canada, Nepal, Singapore,
Switzerland and United States of America – no impact –
“furnishing of services” is sufficiently wide to cover all
kinds of services, including consultancy and managerial
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Requirements to establish service PE
(contd.)
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DTAAs signed by India with the following countries
specifically exclude certain categories of services from the
Service PE Clause:
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United Kingdom – excludes services covered under Article 13 of
the DTAA (Royalties and fees for technical services)
Singapore – excludes supervisory activities in relation to
building sites, etc., covered under Article 5(4) and services in
relation to exploration covered under Article 5(5)
Australia – excludes services in respect of which payments or
credits that are royalties as defined in Article 12
Canada – excludes services covered under Article 12 (Royalties
and fees for included services)
China - excludes technical services as defined in Article 12
(Royalties and Fees for Technical Services)
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Other issues

Definition of a “month” – Section
3(35) – General Clauses Act, 1897
– as per British calendar
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“Services within a country”

Some treaties use “within” and
some use “in” – dictionary meaning
is the same
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In re P. No. 28 of 1999
 A (Indian company)
and B (US company)
formed a JV in India
(AB) to manufacture
automobiles
 XYZ – wholly owned
subsidiary of B
 Provides services to
B’s group companies
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In re P. No. 28 of 1999
(contd.)
 AB and XYZ executed a management services
agreement – XYZ is to provide executive personnel
(finance, service, marketing, etc.)
 XYZ contended that it worked as an employment
agency – however, AAR noted that the personnel
were not employees of AB – AB paid XYZ for the
services and not the personnel
 XYZ assumes responsibility for suitability and
competence of personnel for the tasks assigned to
them
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In re P. No. 28 of 1999
(contd.)
 XYZ is responsible to replace the personnel
if they resign
 XYZ has to provide substitutes if these
personnel are assigned to another project AB can ask XYZ to provide additional
personnel, if required
 AAR ruled that Service PE exists
 In Re. P. No. 28 of 1999, [2000] 242 ITR
208 (AAR)
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Metapath’s Case
 Metapath – telecom
software company
 Joint Venture in India
with Bharti Cellular
 Two (2) Expatriates
sent to India to assist
with the setup and
establishment of the
JV
 Stayed in India for one
(1) year
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Metpath’s Case (contd.)
 Employed by both Metapath UK and Metapath India
– salaries paid by UK – expenses paid by India
 CIT (Appeals) held that Service PE was in fact
concluded as the expatriates were rendering
services in India to the Indian JV.
 Issue raised in appeal but the Delhi High Court did
not deal with the issue of Service PE in the
judgment
 DCIT v. Metapath Software International, Inc.,
[2006] 9 SOT 305 (NULL)
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Morgan Stanley’s Case
 MS and Co., Inc.
outsourced some of its
functions to MSAS
 MS and Co., Inc. also
provided some
personnel who were
overseeing the
outsourced activities
and they were also
providing managerial
services
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Morgan Stanley’s Case
(contd.)
 Secondment arrangement
MS and Co., Inc. bore the risk of the
employee’s activities
 The employees were assured of their
original jobs when they returned to the US
 Employees were under MS and Co., Inc’s
control
 AAR ruled Service PE existed

 Appeal to Supreme Court
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Morgan Stanley’s Case
(contd.)
 Supreme Court differentiated between
“stewardship activities” and “deputationist”
Stewardship – protect MS and Co., Inc’s
interest – not a service to MSAS – no
Service PE
 Deputationist – day-to-day management of
MSAS – Service PE concluded
 However, no income attributable to Service
PE as MSAS was remunerated on an arm’s
length basis
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Morgan Stanley’s Case
(contd.)

Pointers

Widely acclaimed as the right decision for the
wrong reasons
 Co-relation between Article 5(1) and 5(2) –
Whether the services are related to the foreign
enterprise’s business
 Attribution – MSAS was not reckoned as Service
PE – Service PE would be some sort of a fictional
entity
 Avoid “lien”, “risk” and “control”
DIT v. Morgan Stanley, [2007] 292 ITR 416 (SC)

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Golf in Dubai’s Case
 Golf in Dubai LLC
– organizes golf
tournaments
internationally
 Conducted two (2)
golf tournaments in
India
 Hired golf courses
– received
sponsorships from
India and abroad
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Golf in Dubai’s Case
(contd.)
 AAR
“furnishing of services” – bilateral concept
 Requires service provider and service
recipient
 No such service recipient exists – hence
no Service PE
 In any event – time threshold not breached
 In Re. Golf in Dubai, LLC, (2008) 219 CTR
(AAR) 513
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Lucent Technologies’ Case
 Lucent – hardware
and software for
mobile phones
 Indian customers –
after sales
services,
installation, etc.,
through Lucent
India
 Expatriates from
Lucent Affiliate
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Lucent Technologies’ Case
(contd.)
 ITAT held as follows:
Service PE clause covers “other
personnel”
“Other personnel” – controlled by the
foreign enterprise
Affiliate’s personnel controlled by Lucent
Service PE concluded
 Lucent Technologies International, Inc. v.
DCIT, (2009) 120 TTJ (Delhi) 929
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Worley Parsons’ Case
 Worley Parsons –
Australian
company
 Engaged by
ONGC
 Employees visited
India to review
documentation
 Six projects in total
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Worley Parsons’ Case
(contd.)
 AAR – key issues:
Whether a single contract can be called “services”
– as same counterparty and same purpose – all
contracts together amount to the “services”
 As contracts 2, 3 and 4 fall within the same
financial year – they are to be reckoned together to
determine number of days
 Service PE concluded w.r.t. Contracts 2, 3 and 4
 Worley Parsons Services Pvt. Ltd. v. DIT, [2009]
313 ITR 74 (AAR)

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Attribution of Profits
 Generally covered under Article VII
 Involves a fair amount of estimation
 Three (3) approaches:
Direct attribution – profits that the PE would have
made if it was dealing with the enterprise on an
arm’s length basis – most treaties have this clause
Indirect attribution – profits relevant to the portion
of the work done by the PE – e.g., UK
Force of Attraction – US is a typical example
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Attribution of Profits
(contd.)
 Section 9(1) – “income accruing or arising, whether
directly or indirectly, through or from”
 Explanation to Section 9(1) – income “reasonably
attributable to the operations carried out in India”
 Rule 10 of the Income Tax Rules, 1962 – when
actual income cannot be accurately ascertained –
three (3) methods
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Presumptive Method – Rule 10(i) – percentage of
turnover as may be considered reasonable
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Attribution of Profits
(contd.)
Proportionate Method – Rule 10(ii) –
calculated on the basis that ratio of Indian
turnover to global turnover should be
equal to ratio of Indian profits to global
profits
 Discretionary Method – Rule 10(iii) – “in
such other manner as the AO may deem
fit”
 Presumptive Method – taxation on a gross
basis – Sections 44AD, 44AE, 44AF, 44B,
44BB, 44BBA, 44BBB
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Confusing Judicial
Guidance
 In re P. No. 28 of 1999 (supra)
Question not expressly pressed before the
authority
 Obiter – Profits attributable to the services
– fees received as consideration
 Morgan Stanley (supra)
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No further attribution because MSAS was
remunerated at arm’s length – however,
MSAS was not reckoned as the PE
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Confusing Judicial
Guidance (contd.)
 Lucent Technologies (supra)
Question regarding attribution not raised in
appeal before ITAT
 Worley Parsons (supra)
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“income therefrom will have to be
computed in accordance with Article VII of
the DTAA”
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Case Study - A
 Intra-group outsourcing transaction
 ABC, Inc. – Outsources functions to
subsidiary – ABC India (Private) Limited
 Secondment arrangement – MD of ABC
India is an ABC US employee – derives
salary from both – TDS at both levels
 Secondment arrangement includes
indemnity from ABC US to ABC India for
MD’s actions
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Case Study - B
 Intra-group outsourcing transaction
 ABC, Inc. – sets up ABC India (Private)
Limited – Outsourcing contract states that
ABC, Inc. to provide personnel for carrying
out the outsourcing work
 Contracts with XYZ in India for providing
staff (on loan basis) to ABC India (Private)
Limited
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Case Study - C
 Intra-group outsourcing transaction
 ABC, Inc. – sets up ABC India (Private)
Limited – Outsourcing contract states that
ABC, Inc. to provide personnel for carrying
out the outsourcing work
 Contracts with XYZ in India for providing
staff (on loan basis) to ABC, Inc. –
thereafter seconds loaned staff to ABC
India
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Case Study - D
 US marketing firm – receives contract for a
product in India
 Engages a subcontractor (Indian company)
on a principal-to-principal basis for
executing part of the contract in India
 Whether any Service PE exposure exists?
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Case Study - E
 UK company – establishes (76:24) JV in
India
 Sends employees to India to establish JV
business
 Employees stay in India as follows:
Mr. A – March 1 – April 1
 Mr. B – March 1 – April 1
 Mr. C – March 1 – April 1

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Thank You
MAJMUDAR & CO.
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96 Free Press House, Free Press Journal Road, Nariman Point,
Mumbai-21, INDIA
Tel: +91 22 6630-7272, Fax: +91 22 6630-7252
Other offices: Bangalore, New Delhi, Chennai and Hyderabad
E-mail: mailbox@majmudarindia.com
www.majmudarindia.com