It is important to find out if ‘work place’ can be treated as the ‘fixed place of business’
When foreign companies undertake turnkey contracts or installation projects which involve services to be rendered in India, it is quite common they appoint sub-contractors to undertake wholly or in part the activities to be performed in India. The foreign company remains liable for sub-contractor’s job. In other words, sub-contracting does not exonerate the main contractor from liabilities under the contract.
The issue to be considered is whether the arrangement of sub-contractor will create foreign company’s Permanent Establishment (PE) in India. In this context it is important to find out whether sub-contractor’s work place can be treated as the “fixed place of business” of the foreign company in India? If the answer is yes, then the sub-contractor’s work place may establish the foreign company’s PE in India.
Another dimension of the problem is the sub-contractor may undertake a part of the work in his regular workshop or factory and a part of the work at the site where the foreign company’s contract is to be executed.
If the duration of the work done by the sub-contractor at his workshop or factory is taken into account the total duration of the project completion in India will increase. The duration is significant because almost all the tax treaties contain a specific clause in the article dealing with PE that if a building site or construction, installation or assembly project continues beyond the specified period, then a PE is created. Such period generally ranges from six months to nine months.
In a recent judgment delivered on 11.09.2009 in case of Pintsch Bamag, the Authority for Advance Rulings dealt with the above issues at length. In the said case a German company got a contract in India for work design, fabrication supply, transportation, delivery, installation etc. in relation to Sethu Samudram Ship Channel Project. The German company sub contracted most of the above work to an Indian company. The Indian company partly did the work in its workshop and factory which was far away from the site and partly at the site.
The contention of the Revenue was the sub-contractor is undertaking various activities which constitute the core of the entire work. The sub-contractor is a nominee of the foreign company and his activities are on behalf of the foreign company. Therefore, the workshop or place of work of the sub-contractor is like fixed place of business of the foreign company. Further, the duration of the work done by the sub-contractor at his workshop and factory should also be taken into account to calculate the duration of the project in India.
On the question whether sub-contractor’s factory or work place can be treated as foreign company’s fixed place of business, the Authority held that the answer could only be in the negative unless the sub-contractor is treated as the dependent agent of the foreign company as distinct from an independent agent. The Authority observed that It is not possible to hold that the place of manufacture of the sub-contractor situated far away from the installation site should notionally be regarded as part of foreign company’s permanent establishment.
Revenue’s contention that work done at sub-contractor’s work place should be taken into account for calculation of the duration of the activities in India was also rejected.
The above ruling is a landmark which should set at rest the controversy arising in situations where the foreign company sub-contracts wholly or partly the execution of work in India. It is however important to note that the sub-contracting will not have any adverse effect on the establishment of the foreign company’s PE in India provided the sub-contractor is an independent contractor and is not a dependent contractor of the foreign company, and nor its agent. Further, the dealings between the foreign company and the sub-contractor should be on principal to principal basis. If above precautions are properly taken, sub-contract will not create PE in India.
The author is a Sr. Partner in S.S. Kothari Mehta & Co.)
