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Construction /
Installation and
Service Permanent
EstablishmentEstablishment
WIRC of India
Harsha Rawal
6 August 2011
Construction or
Installation PE
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Discussion Draft 1
Meaning
Constituents of Construction/Installation PE UN Model OECD Model US Model
Building site � � �
Construction � � �
Assembly project � X X
Installation project � � �
Supervision activities in connection with above � X X
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Supervision activities in connection with above � X X
Drilling rig used for exploration of natural
resources
X X �
Ship used for exploration of natural resources X X �
Duration – Lasts for more than 6 months 12 months 12 months
Indian Tax Treaties
Variations in Treaties Tax Treaty Countries
Supervisory activities not included explicitly Netherlands, Egypt, Sri Lanka, Slovenia, Malaysia, Libya,
Japan, France
Supervisory activities included explicitly Germany, Mauritius, Sweden, USA, UK, Norway
Aggregation of unrelated site or project Australia, Canada, China, Denmark, Italy, New Zealand,
Norway, Romania, Sweden, Turkey, Ukraine, USA
Project or supervisory activities incidental to sale of
plant and machinery where consideration exceeds 10%
of sale price
Belgium, Italy, Romania, Sweden, Turkey, UK
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.3Discussion Draft
of sale price
Installation not covered in the definition Bangladesh, Belarus, Brazil, Ireland, Israel, Kenya, Libya,
Malta, Mauritius, Oman, Philippines, Vietnam, Zambia
Installation and assembly not covered in the definition Libya, Philippines
Construction not covered in the definition Libya
Variation in threshold between 3 to 12 months –
generally 6 months
Exception: Greece Treaty – One day constitutes PE
Additional clause for exploration / exploitation of natural
resources
� Netherlands, France, Denmark - exploration of natural
resources
� Italy, Ireland, China – exploration or exploitation of
natural resources
� Building site or construction projects include
� Buildings including renovation thereof
� Sewer systems
� Bridges or canals
� Excavating and dredging
� Laying of pipelines
� Demolition and clearing operations
Building site or Construction & Assembly or Installation Project
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� Assembly or installation projects include
� Assembly or re-grouping of pre-fabricated elements such as erection of steel scaffolding or units of production
� Installation of complex machines
� Installation of gas pipelines under river
� Laying of foundation of oil platform
Discussion Draft
The term installation includes assembly
� UN Model
� Specifically included in construction / installation PE clause
� OECD Model
� Not specifically included in construction / installation PE clause
� As per commentary – embedded in the definition
� US Model
Supervisory Activities
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� US Model
� Not specifically included in construction / installation PE clause
� Supervisory activity carried out by third party
� where specifically included Construction / installation PE then it is a PE
� SAIL v. ACIT (10 SOT 351) (Del)
� where specifically not included in definition
� UN Model – not covered as Construction / installation PE – UDHE GmbH v. Dy. CIT (57 TTJ 447) (Mum)
� OECD – covered?
Discussion Draft
� Commencement
� Date on which physical work commences, including preparatory activities
� Cal Dive Marine Construction (Mauritius) Limited (315 ITR 314) (AAR)
� Cessation
� Site exists until work is completed or permanently abandoned
Determination of Threshold Period
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.6Discussion Draft
The permanence element of a PE is replaced by a test of minimum length of time
Time on unrelated projects – to be clubbed?
� Threshold to be determined separately for each individual project
� Exception:
� Coherent whole commercially and geographically
� Specific provision for aggregation in DTAA
OECD MC
� 12 Months time applied to each individual site or project
Threshold Period – Issues…
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� 12 Months time applied to each individual site or project
� India’s reservations :- Series of consecutive short term sites or projects operated by a contractor would lead to
PE
Judicial precedents
� J Ray McDermott Eastern Hemisphere Ltd (130 TTJ 121) (Mum)
� Krupp UDHE GmbH (28 SOT 254) (Mum)
� Valentine Maritime (Mauritius) Limited (2010-TIOL-195-ITAT-Mum)
Discussion Draft
Activities extending over more than one Calendar year or Assessment year
� If aggregate period exceeds threshold then PE in each year
� Krupp UDHE GmbH (28 SOT 254) (Mum)
� Clough Projects International Private Limited (2010-TII-55-ITAT-MUM-INTL)
� Difference in language vis-à-vis Article on Independent Personnel Services
� Presence of 183 days or more in relevant fiscal year
If treaty specifically provides for threshold vis-à-vis fiscal year
…Threshold Period – Issues…
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If treaty specifically provides for threshold vis-à-vis fiscal year
� PE only in fiscal year where threshold is exceeded e.g. Singapore
Temporary Interruptions
� OECD, Skar, Klaus Vogel – To be included in threshold period e.g. Weather conditions, strikes, resource shortage
vacation
� Interruptions due to legal prohibition – whether included?
Discussion Draft
Subcontractors time
� OECD – to be included
� Pintsch Bamag (AAR) – not to be included
Preparatory Activities
� To be included?
� Cal Dive Marine Construction (Mauritius) Limited (315 ITR 314) (AAR)
…Threshold Period – Issues
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.9Discussion Draft
Whether Article 5(2) / 5(3) relating to construction / installation PE override Article 5(1)?
� P. No. 24 of 1996 (237 ITR 798) (AAR)
� Brown & Root Inc., In re (153 CTR 18) (AAR)
� Cal Dive Marine Construction (Mauritius) Limited (315 ITR 314) (AAR)
Office or workshop in connection with construction or installation
� Test of Article 5(1) or 5(3)?
General Issues
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.10Discussion Draft
Select Decisions
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Discussion Draft 11
Steel Authority of India Ltd. Vs. ACIT (10 SOT 351) (Del)
� Facts
� M/s BMH Claudium Peters AG, Germany (BMH) provided technical supervisory services to SAIL in connection
with the installation of a steel project in India
� The services were rendered for more than six months
� The assessee and SAIL were of the view that the services were not covered under Article 5(2) of India-Germany
treaty as
� the installation of the project was not BMH’s responsibility
� the clause is attracted only where supervisory activities are carried out for the installation/assembly project
Select Decisions…
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.12
� the clause is attracted only where supervisory activities are carried out for the installation/assembly project
belonging to the assessee
� the services are covered under Article 12(4) of the India-Germany treaty
� there was no PE of BMH in India
� services are taxable at 10% on a gross basis in accordance with Article 12
� SAIL filed an application with the authorities to authorize the payment at 10% of WHT
� The duration of work in respect of each contract in India on standalone basis did not exceed 9 months
Discussion Draft
Steel Authority of India Ltd. Vs. ACIT (10 SOT 351) (Del)
� Held
� The supervisory activities could have resulted in a service PE where carried out for more than six months
irrespective of whether the project belonged to the assessee or not
� BMH had a PE in India on account of supervisory services in view of Article 5(2)
� Accordingly, the exclusionary provisions of clause 5 of Article 12 of the treaty were applicable
� The WHT rate of 30% is applicable in view of section 115A of the Act
…Select Decisions…
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.13Discussion Draft
Cal Dive Marine Construction (Mauritius) Limited (315 ITR 314) (AAR)
� Facts
� Cal Dive Marine Construction (Mauritius) Limited (“the Company”) a tax resident of Mauritius has entered into an
agreement with an Indian Company for laying pipelines under the sea and constructing the structures
� The work consists of transportation and installation engineering, transportation, pre-trenching, pipe laying, back
filling, installation, pre-commissioning and surveys, erection , construction, testing and handing over services
� The activity such as completion of Pre-construction survey, completion of installation of pipeline and
demobilization of DLB Spread from site will be executed in India and all other activities will be executed outside
India except small portion of few services being executed in India wherein the duration was between 2-4 days
…Select Decisions…
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.14
India except small portion of few services being executed in India wherein the duration was between 2-4 days
� The installation project was for period from October 2008 to April 2009
� Held
� Article 5 has to be read as a whole, harmonious interpretation of Article 5(1) and Article 5(2)(i)needs to be made
for constitution of PE
� The starting point of the contract cannot be prior to Pre-construction survey carried during October 2008 and the
overall duration for installation is less than 9 months period as required by Article 5(2)(i) and hence no
Installation PE in India
Discussion Draft
J Ray McDermott Eastern Hemisphere Ltd (130 TTJ 121) (Mum)
� Facts
� The Appellant Company is a Mauritius based company and is engaged in the business of installation of offshore
platforms, decks, pipelines, jackets and various other similar activities, for the purposes of mineral oil exploration
� The Appellant Company was engaged in executing certain installation contracts in Tapti and Panna offshore
fields in the Indian continental shelf
� In the absence of PE, the income was claimed as not liable to tax in India under India – Mauritius treaty
� The duration of work in respect of each contract in India on standalone basis did not exceed 9 months
…Select Decisions…
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� Held
� Even a plain reading of art. 5(2)(i) would show that, for the purpose of computing the threshold time-limit, what is
to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or a
supervisory activity connected therewith, and on all the activities in a tax jurisdiction as whole
� There is no specific mention about aggregating the number of days spent on various sites, projects or activities
� When aggregation is not specifically provided for in the relevant PE definition clause, normally it cannot be open
to infer the application of aggregation principle
Discussion Draft
Krupp UDHE GmbH (28 SOT 254) (Mum)
� Facts
� Krupp UDHE GmbH (“the Company”) a tax resident of Germany is engaged in the business of providing
technical know how, basic engineering services and supervisory services in connection with the construction or
installation of specified machinery
� The Company has engaged into several contracts to provide supervisory services to various Indian clients
� The period of stay of Krupp’s personnel in the relevant year did not exceed the threshold limit of 6 months
although the overall supervisory activities in India did exceed 6 months
…Select Decisions…
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� Held
� The duration of supervisory activities must be considered from the date of Contractor’s activities start and when
they finish and not start/end date of entire project
� In India Germany treaty, the duration of 183 days is to be counted over the period of activity and not in a financial
year or calendar year
� The aggregation of the activities of unconnected projects is unwarranted, in the absence of aggregation provision
under India Germany treaty
� The projects are not commercially or geographically coherent and there is no requirement to aggregate the time
spent on different contracts
Discussion Draft
Valentine Maritime (Mauritius) Limited (2010-TIOL-195-ITAT-MUM)
� Facts
� Valentine Maritime (Mauritius) Limited (“the Company”) a tax resident of Mauritius is engaged in the business of
marine and general engineering and construction
� The Company has executed 3 contracts in India one related to replacement of main deck with a temporary deck
and other two relating to barge hire contracts
� The individual duration of each of the contracts did not exceed the threshold limit of 9 months as provided in Indo
Mauritius treaty
� The assessing officer aggregated the period of three contracts and held that the Company Installation PE in
…Select Decisions…
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� The assessing officer aggregated the period of three contracts and held that the Company Installation PE in
India
� Held
� If aggregation is specifically provided for in the relevant PE definition clause, then only the time spent on different
contracts would be aggregated
� The 3 contracts were for different purpose and these contracts cannot be viewed as interconnected or
interdependent and accordingly the duration of each project cannot be aggregated
� The barge given on hire cannot be viewed as fixed place of carrying on its business as the Company was itself
engaged in the business of providing barge on hire
Discussion Draft
Clough Projects International Private Limited (2010-TII-55-ITAT-MUM-INTL)
� Facts
� Clough Projects International Private Limited (“ the Company”) a tax resident of Australia, is engaged in the
business of provision of engineering and construction services to various oil and gas companies in India
� The Company has entered into an agreement with BG Exploration and Production India Ltd. for the provision of
engineering, procurement and installation services
� During the financial year 2004-05, the work performed by the Company was limited to placing orders for the
offshore supply of steel and fabrication outside India
� The Company has not completed the time period of 6 months during the year as required by the Article 5(2)(K) of
…Select Decisions…
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.18
� The Company has not completed the time period of 6 months during the year as required by the Article 5(2)(K) of
the India Australia treaty
� Held
� The Installation PE will commence when the supply of steel arrives at the oil well site which falls in the next
financial year
� No Installation PE since neither any installation event took place in India during the year nor the time period of
six months was completed during the year
Discussion Draft
Service PE
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Discussion Draft 19
Overview of Service PE
Under the Act
• Section 92F(iiia) defines PE in an inclusive
manner - PE includes a fixed place of business
through which the business of the enterprise is
wholly or partly carried out
• Whether rendition of services through employees
could create PE in terms of section?
Under the UN Model
• Covered under Article 5
• Service PE - 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 continue (for the same or a connected
project) within a Contracting State for a period or
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• Remarks in the Morgan Stanley
project) within a Contracting State for a period or
periods aggregating more than six months within
any twelve-month period
� Furnishing of services by non-resident
� Through employees or other personnel
� For a specified period
Service PE – Pre-requisites
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 21Discussion Draft
Permanence test of PE replaced by minimum length of time
� According to OECD, the business of an enterprise is carried on mainly by the entrepreneur or persons who are in
paid employment relationship with the enterprise (i.e. personnel). These personnel include employees and other
persons receiving instructions from the enterprise e.g. dependent agent
� Some issues arising in interpreting ‘other persons’ are:
� Whether non-individuals are included?
� Dependent agent could be non-individual
Other Personnel
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� Whether employees of another enterprise included?
� Is there an overlap between service PE and agency PE or are they mutually exclusive?
22Discussion Draft
� Different time periods specified under different treaties in relation to furnishing of services to an associated
enterprise and to a third party
Manner of Counting Number of Days
� Independent Project vs. Same / Connected Project
� Man days vs. Solar Days
� Period of stay spread over different financial year
Specified Period
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 23Discussion Draft
Period of stay spread over different financial year
� Calendar month or 30 day period
Importance of placement in Article 5
� Placements in Indian DTAAs
� Service PE provision in Article 5(3) – Australia and Saudi Arabia
� Service PE provision in Article 5(2) - Canada, China, Nepal etc.
� Whether to constitute Service PE the requirements of Article 5(1) need to be satisfied?
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 24Discussion Draft
Furnishing v. Rendering of services
� Recent decision of Linklaters
� Lawyers services can only be “rendered” and not “furnished”
� No difference between “rendering of services” and “furnishing of services”
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 25Discussion Draft
Service PE vs. Fees for Technical Services
� UN Model doesn’t include the exception for FTS
� Majority of DTAAs signed by India which has a service PE clause specifically exclude income covered under
Article 12 (Fees for Technical Services)
� Further, Article 12 also specifically carves out the FTS income which is effectively connected to a PE
� In such a situation, whether specific head FTS overrides Service PE clause?
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 26Discussion Draft
Service PE vs. FTS vs. Residuary Sources
Fits within the
definition of FTS?
Whether “make available”
condition applicable and
satisfied?
Not taxable
Taxable on gross
basis at treaty rate
Yes
No
Yes
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Whether in the
nature of Business
Income?
Residuary clause
applies
Whether there is a
Service PE?
Profits attributable
to PE shall be
taxable
Not taxable
Taxable as per the
domestic laws
No
Yes
No
No
Yes
27Discussion Draft
Stewardship
� Stewardship services are rendered to protect the interest of the principal
� Sterwards are typically not involved in the day-to-day management or in rendering the services undertaken by the
service provider
� Their function is essentially of quality control and ensuring confidentiality
� Usually, the foreign enterprise does not receive fees from the recipient of such services and the cost of the
personnel performing these services are also borne by the foreign enterprise
� Given the above, stewardship activities do not lead to the constitution of a service PE
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 28Discussion Draft
Secondment
� The typical features of a secondment are:
� An employee of enterprise X in State X is seconded to enterprise Y in State Y
� Employee continues on the payroll of enterprise X
� Employee resides and renders services in State Y
� Employee reports to enterprise Y
� The employee may continue to be paid by enterprise X who in turn is reimbursed by enterprise Y
� Right of Lien is on enterprise X
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
� Right of Lien is on enterprise X
� Supervision, control and management of employee is with enterprise Y
Morgan Stanley’s decisionMorgan Stanley’s decisionMorgan Stanley’s decisionMorgan Stanley’s decision Secondment Secondment Secondment Secondment
constitutes Services PE constitutes Services PE constitutes Services PE constitutes Services PE
Tekmark decisionTekmark decisionTekmark decisionTekmark decision ---- Secondment does not Secondment does not Secondment does not Secondment does not
constitute Services PE constitute Services PE constitute Services PE constitute Services PE
29Discussion Draft
Fund Structuring Issue
Asset Management
Company (AMC)Fund
Management Agreement
Advisory Services
under the Advisory Overseas
Employees of AMC
deputed to IAC
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Indian
Advisory
Company (IAC)
under the Advisory
Agreement
Investee
Companies
Investments
India
Overseasdeputed to IAC
30Discussion Draft
Outsourcing of Services
Co A
Contract for
Provision of
ServicesOverseasSub-contract
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Co. B Co. C
India
Provision of Services
through its employees
31Discussion Draft
Is there a PE exposure for Co. A on account of employees of Co. B rendering
services to Co. C?
References and other
material
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Discussion Draft 32
OECD Model Commentary - Clause as suggested in the Commentary
“Notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a Contracting State performs
services in the other Contracting State
a. through an individual who is present in that other State for a period or periods exceeding in the aggregate 183
days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active
business activities of the enterprise during this period or periods are derived from the services performed in that
other State through that individual, or
b. for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are
performed for the same project or for connected projects through one or more individuals who are present and
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
performed for the same project or for connected projects through one or more individuals who are present and
performing such services in that other State,
the activities carried on in that other State in performing these services shall be deemed to be carried on through
a permanent establishment of the enterprise situated in that other State, unless these services are limited to
those mentioned in paragraph 4 which, if performed through a fixed place of business, would not make this fixed
place of business a permanent establishment under the provisions of that paragraph.”
33Discussion Draft
TreatyExclusion for FTS
No of days
AE Non-AE
Australia Yes One day 90 days
Botswana No 183 days
Canada Yes One day 90 days
China Yes 183 days
Iceland No 90 days
Namibia Yes six months
Nepal No 183 days
Number of days presence in different treaties
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Nepal No 183 days
Norway No six months
Saudi Arabia No 182 days
Singapore Yes 30 days 90 days
Sri Lanka No 183 days
Swiss Confederation Yes 30 days 90 days
Syrian Arab Republic No 183 days
Thailand No 183 days
UAE No 9 months
UK Yes 30 days 90 days
USA Yes One day 90 days
34Discussion Draft
Select Decisions
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.Discussion Draft 35
Morgan Stanley’s Case
Facts of the case
� MS Co. is a US Company engaged in the business of
Investment banking
� MSAS is a wholly owned subsidiary and will perform
back office operations for the parent in India (‘Leg 1’)
� MS Co. will depute its employees to MSAS to provide
services to MSAS (‘Leg 2’)
MS Co.
WOS
US
India
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
MSAS
Employees
deputed
WOS
Back office
operations
Morgan Stanley’s Case
Fixed Place PE
� MSAS does not constitute a PE under Article 5(1) as MSAS performs only back office operations
� Further, activities performed by MSAS fall under Article 5(3)(e) i.e. they are preparatory and auxiliary activities
� Therefore, it is covered by the exceptions and accordingly MSAS does not constitute a PE
Service PE
� Employees deputed by MS Co. to MSAS as and when required by MSAS
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
� Employees deputed by MS Co. to MSAS as and when required by MSAS
� MS Co. had lien on the employees
� Therefore, MSAS constitutes a Service PE of MS Co.
Secondment does not constitute ‘Service PE’
Tekmark Global Solutions LLC’s case
� Employees seconded under a contract for hire of employees – Whether constitute Service PE?
� DDIT vs. Tekmark Global Solutions LLC (Mumbai ITAT) (ITA No. 671/Mum/2007)
� “Contract of Manpower supply” instead of “Contract of service”
� Employees to work under the direct supervision and control of Indian Company
� Indian company has a right to remove the employees
� Employees continue on the foreign company’s payroll
� Income earned not for services rendered through employees presence in India, but earned for providing
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
� Income earned not for services rendered through employees presence in India, but earned for providing
manpower to Indian company
Secondment constitutes ‘Service PE’
Thank You
Presentation by Harsha Rawal
Director
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