Permanent establishment test and treaty exemption barred Indian taxation of foreign technical personnel and expatriate salaries.
A foreign enterprise supplying expatriate supervisory and technical personnel for offshore drilling had no permanent establishment in India because it had no fixed place of business and no authority to conclude contracts there; its receipts were therefore not taxable as industrial or commercial profits under the treaty. Expatriate salaries were also exempt in India because the treaty conditions for employment income were met, and the absence of a permanent establishment meant the deduction-based limb was not triggered. The treaty prevailed over domestic charging provisions, and the attempted assessment failed for lack of taxable business presence and taxable profits in India.
Issues: (i) Whether the foreign enterprise had a permanent establishment in India and its receipts were taxable as industrial or commercial profits under the treaty; (ii) Whether the salaries paid to the expatriate employees were taxable in India or exempt under the treaty provisions governing employment income and technical services.
Issue (i): Whether the foreign enterprise had a permanent establishment in India and its receipts were taxable as industrial or commercial profits under the treaty.
Analysis: The agreement showed that the foreign enterprise was engaged to provide expatriate supervisory staff and technical personnel for assisting the owner in offshore drilling operations. The rig belonged to ONGC, and the foreign enterprise did not itself carry on drilling business in India nor did it have a fixed place of business, branch, office, or other established place of business in India. Mere service of duplicate orders on an intermediary and the presence of personnel for operational assistance did not amount to a person habitually exercising authority to negotiate and conclude contracts on behalf of the enterprise. The receipts were attributable to technical services, not industrial or commercial profits.
Conclusion: The foreign enterprise did not have a permanent establishment in India, and Article III governing industrial or commercial profits was not attracted. This issue was answered in favour of the assessee.
Issue (ii): Whether the salaries paid to the expatriate employees were taxable in India or exempt under the treaty provisions governing employment income and technical services.
Analysis: The treaty provisions relating to fees for technical services governed the receipts, and such receipts were not required to be taxed on the footing of business profits. For employment income, the relevant treaty article allowed exemption where the employee was present in India for not more than the stipulated period, the remuneration was paid by a non-resident employer, and the remuneration was not deductible in computing the profits of a permanent establishment chargeable in India. The first two conditions were satisfied, and since no permanent establishment existed in India, the third condition was not attracted. The treaty therefore prevailed over the domestic charging provisions.
Conclusion: The salaries of the expatriate employees were exempt from tax in India under the treaty. This issue was answered in favour of the assessee.
Final Conclusion: The treaty provisions excluded taxation of the impugned salaries in India, and the departmental basis for assessment failed because neither a permanent establishment nor taxable business profits in India was established.
Ratio Decidendi: Where a foreign enterprise merely supplies technical personnel for offshore operations, without a fixed place of business or authority to conclude contracts in India, its receipts are not industrial or commercial profits; expatriate salaries are not taxable in India when the treaty conditions for employment income are satisfied and no permanent establishment exists.
TaxTMI 
AI Drafter ✕
TaxTMI 
