The Indian coaching middle is not going to type the PE company

The Mumbai Bank of the Income Tax Appellate Tribunal (Tribunal) in the case of the International Air Transport Association (Canada) (Ita No. 587 / mum / 2016) (2021) (taxpayers) treated the activities of Authorized Training Centers (ATCs) in India as exempted from the provision on the permanent establishment of a dependent agent (agency PE) in accordance with Article 5 (5) of the tax treaty between India and Canada (tax treaty) in India, as the air traffic control units are not wholly or almost entirely for or on behalf of the taxpayers in India, in particular if such air traffic control units in India were independent agents who acted in the normal course of business.

The tribunal also ruled that revenues in the form of accredited ATC fees, sales of physical manual publications and provision of advertising space were not classified as royalties under Article 12 (3) of the Tax Convention.

Facts of the case

The Taxpayer is a Canada-based tax agency that has established nonprofit organizations to promote safe, reliable, secure, and economical services for the benefit of the commercial aviation industry worldwide. The taxpayer had ATCs in India to provide distance learning courses to aviation students around the world and in India, and established a registered Indian Branch.

For the year under review, the taxpayer offered income from classroom training, accredited training centers with annual fee, with the exception of certain income such as sale of distance learning materials, provision of e-services, collection of membership fees, sale of publications, provision of classroom training courses, provision of advertising space, taxes in India.

The Revenue Authority (Revenue) treated the Indian ATCs as the PE of the taxpayer and taxed the income from distance learning courses as corporate profits under Article 7 of the tax treaty. Accordingly, the revenue accounted for 40% of the gross receipts from Indian branch revenue generated from memberships, BSPlink services, etc.

In addition, income from the sale of publications, registration fees for manuals and the provision of advertising space on websites and publications, and fees from accredited training centers were characterized and taxed as license fees. The order of receipts has been confirmed by the dispute settlement body.

Court ruling

PE branch

The Tribunal only viewed the taxpayer as an intermediary / intermediary to reclaim BSPlink fees from the airlines and agents through the Indian branch for remittance to his company at no extra charge. Accordingly, the collection of BSPlink fees on a cost-only basis by the airline taxpayer was not a "business income" but was considered a reimbursement.

The Tribunal analyzed that the profit attributable to an establishment is based on the role and responsibility of the PE executing the transactions. Interestingly, the Tribunal accepted that although the Indian branch was a PE of the taxpayer in India in application of Article 5 (2) (b) of the Tax Convention, the mere collection of the taxpayer's membership fees made directly outside of India is not imputable to the Indian Branch.

Accordingly, the Tribunal confirmed that only a portion of the profits attributable to the PE in India (i.e. the Indian branch) were taxable in India and no income from functions / activities outside India was taxable in India, citing the Supreme Court Case of Ishikawajma Harima Heavy Industries Co. Ltd.

The matters related to the above questions have been returned to revenue for reassessment and decision.

Agency PE

The tribunal agreed that although the taxpayer does business in India through air traffic control units, they are independent entities that operate in the normal course of business and train students to help them get started in the aviation, travel and tourism industries. The air traffic control units were not involved in any form of exclusive courses for the taxpayer, but they did plan many such courses for third parties.

Therefore, the activities of Indian Air Traffic Control Units cannot be described as wholly or almost wholly intended for and on behalf of the taxpayer.

Accordingly, the Tribunal came to the conclusion that the air traffic control units, as independent representatives within the meaning of Article 5 (5) of the Tax Agreement, cannot constitute an agency PE of the taxpayer in India. Therefore, the adjustment of the income from the sale of distance learning materials attributed to the status of air traffic control units as the taxpayer's PE agency should be deleted.

License fees

The general course material containing knowledge, information and training for the aviation, travel and tourism industries was sold to the students / air traffic control units without a “right of use” or a “right of use” being granted to the study material. The students / ATCs also had no right to reproduce / sell the content of the study material in any form.

The Tribunal stressed that the knowledge, information and training about the aviation and tourism industries in the course materials through the sale of books / CDs are general in nature and do not involve the transfer of intellectual property (IP). The material did not have any secret technical information and / or know-how that is not readily available to the public and therefore does not fall within the scope of the term "information relating to technical, industrial, commercial or scientific experience" in Article 12 (3). of the tax treaty.

In reaching this conclusion, the Tribunal relied on the decisions of Hughes Escort Communication Ltd 31 CCH 128 (2012) and HEG Ltd.

Separately, the Tribunal analyzed that the sale of the manual was just a sale of a book with no transfer of intellectual property, as the manuals were a comprehensive and simplified compilation of instructions on how to safely transport dangerous goods in accordance with aviation policy, with no secret technical information and / or know-how -how included; Therefore, such a sale cannot be described as “information on technical, industrial, commercial or scientific experience” under Article 12 (3) of the Tax Convention.

The Tribunal found that the provision of advertising space by the taxpayer to its clients through websites or publications / manuals did not result in any transfer of the right to use, display, exploit or modify the taxpayer's brand or logo. Essentially, the consideration was given to customers because customers were not granted any “use” or “right to use” copyrights, patents, trademarks, designs or models or plans in providing advertising space in their publications / manuals or on their website cannot fall within the scope of the definition of “royalties” under Article 12 (3) of the Tax Convention.

The tribunal relied on the decisions of Right Florists, Yahoo India (P) Ltd. and Pinstorm Technologies Pvt. 154 TTJ 173 (2013).

The consideration for course materials, the sale of manuals or the provision of advertising space cannot be described as a "license fee" within the meaning of Article 12 Paragraph 3 of the Tax Agreement if the following assumption is used:

  • Publications were a direct sale to customers without any "use" or "right of use" or copyright being granted with respect to the publication.
  • Customers have no rights to reproduce / sell any content of the publication in any form or transferred in any media;
  • Customers had no right to use, patent, trademark, design or model, blueprint, secret formula, or method for delivering physical publications.
  • The mere compilation of instructions for the safe transport of dangerous goods in accordance with aviation policy did not lead to an exchange of experience, techniques or methods.
  • The information contained in the publications was merely a simplified compilation of publicly available data and was not treated as conveying information about technical, industrial, commercial or scientific experiences.
  • Information related to industrial, commercial or scientific experience (i.e. know-how) generally implies classified technical information related to industry, trade or science, but which was not the information published in the manuals.

Since the consideration received from the taxpayer only concerned a simpler sale of training materials / books, manuals or the provision of advertising space without the inclusion of a right of use, it cannot be treated as a "license fee" within the meaning of Article 12 paragraph 3 of the Tax Agreement.

The central theses

The context of establishing PE in India or characterizing the payment as a royalty under the tax treaty or Indian domestic law has been tried in numerous courts in India. The case of the tribunal is certainly beneficial given the various developments in the field of international taxation which are constantly evolving to protect the interests of developing countries.

It is worth referring to the case of the Delhi Supreme Court of the E-Funds Corporation, which stipulated that a subsidiary cannot, by itself, constitute an agency PE of the client. A subsidiary can only become dependent or independent if the conditions of Article 5 (4) and Article 5 (5) of the applicable tax treaty are met. It is important to note that Article 5 (5) of the applicable tax treaty does not apply if the transactions are taxed on market terms.

It is also worth noting to refer to the concept of the Organization for Economic Co-operation and Development (OECD) BEPS Action Plan 7, which deals with common tax avoidance strategies used to prevent the existence of a PE and broaden the scope of the PE agency .

India's 2018 Domestic Tax Act, coupled with the OECD's BEPS Action Plan 7, expanded the agency PE definition to include situations where an agent usually plays the leading role leading to the conclusion of contracts that are routinely entered into with no significant change by the company become. The mandatory amendment to the agency PE makes it imperative to review similar transactions which, according to the revised definition, could result in a taxable presence of such activities in India.

Interestingly, the views expressed by the Tribunal on royalties are in line with the 2018 Supreme Court Case 8733-8734 of the Appeal Center for Technical Analysis of the Private Analysis Center of Excellence. 02/03/2021 in which amounts paid by resident Indian end-users or distributors to non-resident computer software manufacturers and suppliers considered in consideration for reselling or using the computer software under an end-user license agreement and out-of-jurisdiction distribution agreement were the license fee definition, application of the relevant tax treaty without the right to use the copyright of the computer software.

With regard to the tax liability of income from the provision of advertising space, reference should be made to the Bangalore Tribunal of Google India Private Limited, in which it was found that the payment on distribution rights of the "AdWord program" in the context of India – Ireland as a "license fee" taxable was tax treaty as the agreement was not only an agreement to provide advertising space, but also an agreement to facilitate, display, and publish advertising to its customers through patented tools and software.

It is important that Indian domestic tax law expanded the scope of taxation in 2016, taking into account the BEPS Action Plan 1 of the OECD for the digital economy, by introducing the concept of the equalization tax (EL) with 6% for "specified services" as an online Advertise, provide digital advertising space or any other facility or service for the purpose of online advertising and other related services if the non-resident of India has not had a PE and that total payment exceeds Indian Rupees 100,000 (US $ 1,300).

With the advent of the Finance Act of 2020, the scope of the EL was expanded to include all non-resident e-commerce operators who offer "e-commerce offers or services" for all forms of digital services, so that the EL is broad enough to accommodate several Business models to be included in the EL digital control network. It is imperative that following the case of the Supreme Court of the Engineering Analysis Center of Excellence Private Limited, the tax liability of foreign software sellers without PE in India can be reduced from 10% withholding tax as a license fee in India to 2% EL.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Shailendra Sharma is a Chartered Accountant and associated with a multinational financial services company in India.