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Definition of Fixed Place PE Clarified When Storing Goods in a Warehouse

26 Jul 2010

The Authority for Advance Ruling ("AAR") delivered an important ruling in the case of Seagate Singapore International, wherein it held that a specific place for storing goods of a non-resident in a warehouse for delivery to Indian customers would be regarded as fixed place PE in India, under the India-Singapore Tax Treaty. Taxand India examines the new ruling.

The applicant to the AAR, a Singapore company engaged in the manufacture of hard disk drives, entered into an agreement with an independent logistics service provider in India for warehousing its goods for delivery to Indian customers. The service provider was responsible for clearing the goods from customs port, storing the goods in bonded warehouse and executing customs bond for customs free clearance of goods. The service provider was also registered with the authorities for Value Added Tax ("VAT") and was responsible for paying applicable taxes and filing returns in connection with the delivery of goods to Indian manufacturers.

The ownership of goods remained with the applicant and the sale proceeds were also received directly by the applicant. Under the contract, the service providers were required to make adequate space available, including provision of racks to store the applicant's products. The applicant's agent or contractor had the right to enter the warehouse for physical inventory, inspection, audit and other incidental activities, though after an advance notice to facilitate the entry. The service providers had to establish necessary security and systems to support electronic data interchange and furnish receipt, sale advice and inventory reports to the applicant. The applicant approached the AAR to determine whether the warehouse would be treated as a PE for the applicant.

The AAR observed that though the warehouses were owned and were in the possession of the logistics providers, a distinct, earmarked and identified space in the warehouse catered to the applicant's business operations in India. It noted that both the applicant and the service provider had to act in cohesion to ensure the product delivery to customers. Under the India-Singapore Tax Treaty, the habitual maintenance of stock of goods in India by a person acting on behalf of a Singapore resident, from which the person regularly delivers goods on behalf of the Singapore resident results in a PE for the Singapore resident.

Considering the above, the AAR concluded that the earmarked space in the warehouse constituted a fixed place of business where the applicant's business was carried on. It held that mere outsourcing of business operations instead of carrying it through the applicant's own employees would not rule out the existence of fixed place PE. The AAR further held that the service providers being independent or not would not be of material relevance once the existence of fixed place PE was established.

Taxand's Take

The above ruling makes it imperative for non-residents exporting goods to India to appropriately plan their logistics and supply chain structures. The Tax Treaties entered by India with certain countries such as China and Malaysia specifically exclude the maintenance of goods in India solely for delivery from being considered as a PE. Hence, entities with global operations should revisit their supply and distribution strategies to position their structures appropriately considering the relevant Tax Treaties.

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