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Permanent establishment needs to be long term in nature

11 Jul 2013

The Delhi Bench of the CESTAT has examined the scope of the term permanent establishment used in Section 66A (2) of the Finance Act 1994. This ruling assumes significance as it has interpreted permanent establishment for the provisions of the Act which, otherwise, is not statutorily defined. Taxand India explores the case which led to this decision.

M/s SNC Lavalin Inc (SNC Lavalin) was appointed as Executing Engineer by the Government of Uttaranchal for a project. They provided design, engineering and technical services directly from their Canadian head office, and were undertaking all the activities for the project. SNC Lavalin also had a project office in India which was registered with the service tax department under the taxable service of ‘consulting engineering service’. While working on the project, SNC Lavalin deputed some of its employees at the project office and raised debit notes in respect of the salary and other expenses of such employees. As the deputation of the employees was for the project, no service tax was paid on the debit notes raised on the project office.

The issue before the CESTAT was whether the activity of deputation of employees by SNC Lavalin to their project office will attract service tax under Section 66A of the Act, i.e. whether the activity was between a permanent establishment situated outside India and another permanent establishment within India of the same person, and therefore exigible to service tax.

SNC Lavalin argued that the project office could not be treated as permanent establishment since it was opened only for the project. The Tribunal agreed and interpreted the term permanent establishment to mean a branch or agency of a foreign based company, which has been set up for carrying out the business on long term basis.

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Taxand's Take

The Tribunal has taken a reasonable approach by ruling that the term permanent establishment would cover a branch or an agency which has been set up to carry on business on a long-term basis. This should provide some relief in those cases where the tax authorities are seeking to recover tax on charges between a head office and a project office, under the law applicable prior to 1 July 2012.

The stay order may not have direct relevance for the period after July 2012 since the amended provisions use differing terms such as ‘business establishment’ or ‘fixed establishment’ to determine presence in India. Nonetheless, since this decision is consistent with the clarification provided in the Education Guide, the decision may continue to have persuasive value even for the period after July 2012.

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