International Tax Updates

Permanent establishment is an often litigated topic not just in India, but also across the globe. In a recent decision of the German Federal Tax Court, a Fixed Place PE was upheld of a UK tax resident in Germany basis presence of a lockable space. 

The individual, resident of the United Kingdom was an aircraft engineer. Y Ltd, a UK based entity concluded line maintenance agreements with a German company for providing licensed aircraft maintenance personnel (and their tools). Y Ltd in turn subcontracted work to the taxpayer and accordingly, a ‘Freelancer Agreement’ was entered into for rendition of aircraft-related maintenance services (and their tools). 

Work was carried out on the airport premises of the German company. The taxpayer and other freelancers working on behalf of Y Ltd had access to the changing rooms and administrative and communal areas as well as assigned designated lockers with their names for storing personal items such as mobile phones, keys, money, clothes etc. Every freelancer including the taxpayer held an airport security badge and had to undergo a security check for accessing their work area.

The Federal Tax Court noted that PE constitutes a business facility or facility with a fixed relationship that lasts for a certain period, serves the activity of the company and over which the taxpayer has a not just temporary right, has power of disposal. Therefore it indicates, carrying out entrepreneurial activity with strong local ties.  It was observed that the taxpayer had the power of disposal in the sense of the possibility of using the rooms essential in connection with the provision of services (hangar, computer room, administration/lounge and changing room). 

In light of the above, the Federal Tax Court held that the freelancing activities of the taxpayer satisfied all the constituents of PE as defined under Article 5(1) of the UK-Germany DTAA and thus, a PE is constituted. Accordingly. the Federal Tax Court held that taxpayer was held liable to pay taxes in Germany.​

The taxpayer, a German company, carrying business of publishing technical books and journals set up an LO with the approval of Reserve Bank of India (‘RBI’) to only act as a communication channel between the Head Office and the customers in India. 

Tax authorities did a survey on the LO wherein they gathered certain documents and recorded statements of the senior employees of the LO. Based on the information gathered during the survey, the tax officer initiated reassessment proceedings i.e., scrutiny assessment proceedings for the past years. Tax officer concluded the scrutiny proceedings and held that the activities with regard to printing of books through third party printers in export processing zone (EPZ), determination of the cost components for books and journals and involvement in its sales to distributor are not merely preparatory and auxiliary activities. Thus, it constituted LO as the Fixed Place PE of the taxpayer and attributed 15 per cent of the sales. Taxpayer challenged the said order before the appellate authorities.

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On the validity of opening of tax scrutiny proceedings for past years, the Delhi Tax tribunal held that material gathered and statements recorded during the survey shall be considered as a tangible material to hold a prima facie view that income has escaped assessment and thus opening scrutiny proceedings for past years are valid.

On the question of PE of the taxpayer, the Delhi tax tribunal held that even though the LO is not directly involved in the direct sales of the products, the fact that it involved in printing of the books at EPZ in India, deciding their cost component and sales is of much wider magnitude than mere preparatory and auxiliary activities. Therefore, Delhi tax tribunal also held that LO constitutes a Fixed Place PE as per the provisions of DTAA between India and Germany and attributed 11 per cent as net profit of the total sales made in India attributed to the PE.​