ATO ID 2007/143: Permanent Establishment: resident of India - business activities
Date of decision: 12 June 2007
Year of income: Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009
Business line: Public Groups and International

Issue
Whether the taxpayer has a Permanent Establishment in Australia pursuant to Article 5 of Schedule 35 to the International Agreements Act 1953 (Agreements Act)?

Decision
No. The taxpayer does not have a Permanent Establishment in Australia pursuant to Article 5 of Schedule 35 to the Agreements Act.

Facts
The taxpayer company is a resident of India and a non-resident of Australia for Australian income tax and tax treaty purposes. The taxpayer is part of an Indian business group (the Indian business group). The taxpayer entered into a long term contract with an unrelated Australian resident company (the customer) for the supply of goods not connected to the exploration or exploitation of natural resources. Under the contract, the taxpayer is obligated to undertake all costs of transporting the goods to Australia and storing those goods in Australia until the time that the goods are requested by the customer. The title of goods passes in Australia when the goods are delivered to the customer and it is at this point that the taxpayer recognises the sale of the goods as income. The customer will remit payments to the taxpayer in India periodically on the basis of the goods delivered. Activities associated with fulfilling the contract, for example, invoicing, administration and so on are performed by the taxpayer in India. The taxpayer has no employees or agents permanently present in Australia for the purpose of the contract. The taxpayer has no office or branch in Australia. Nor will it own any other property or assets (including bank accounts) in Australia. Further the taxpayer will not use any substantial equipment in Australia for the purpose of this contract or otherwise. The taxpayer entered into an agreement with a Third Party Logistics (TPL) supplier to provide support services. The TPL provider is a resident of India and a related company, also being part of the Indian business group. The taxpayer manufactures the goods in India and makes them available at its factory in India for the TPL provider. The TPL provider arranges for the collection of the goods from the taxpayer's factory and the transportation of the goods to Australia. The TPL provider is responsible for performing all the supply chain activities in Australia on behalf of the taxpayer. For example, the TPL provider contracts with independent unrelated parties in Australia to effect the transportation and storage of the goods in Australia. The warehouse used to store the goods until they are despatched to the customer is owned by an unrelated independent third party. All functions performed by or on behalf of the taxpayer in Australia are pursuant to contracts with third parties with the exception of some minor repairs. The presence of the taxpayer's personnel in Australia to perform repairs will not cumulatively exceed 90 days in any 12 month period. Other than the above, the taxpayer, or the TPL provider on behalf of the taxpayer, does not perform any services in Australia pursuant to this contract. The taxpayer's relationship with the TPL provider in respect of this contract can be summarised as follows: The taxpayer has also appointed an unrelated independent individual to liaise with the customer. The liaison person will report on quality issues raised by the customer. The liaison person is not an employee of the taxpayer but is engaged on a contract basis with the taxpayer. The liaison person does not operate wholly or exclusively on behalf of the taxpayer and will charge for his services on a similar scale to what he charges other companies for whom he performs a comparable role. The liaison person may not procure any orders for the taxpayer and has no authority to contract on behalf of the taxpayer or to otherwise bind the taxpayer. Also the liaison person is not authorised to release the goods to the customer or to perform other roles carried out by the TPL provider.

Reasons for decision
Summary: Schedule 35 to the Agreements Act contains the tax treaty between Australia and the Republic of India (the Indian Agreement). Relevantly Article 5 of the Indian Agreement defines the term Permanent Establishment (PE). Article 5(1) of the Indian Agreement contains the general definition of a PE which is as follows: for the purposes of this agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on Article 5(2) of the Indian Agreement further illustrates the general definition by providing listed facilities that are included in the definition. For example, at subparagraph (a): a place of management Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the OECD Model Tax Convention and Commentaries are relevant to interpreting Australia's tax treaties. Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the general definition of a PE contains the following conditions: The taxpayer does not have any facilities listed in Article 5(2) of the Indian Agreement, or more importantly a fixed place of business within the general definition as provided by Article 5(1) of the Indian Agreement. Notwithstanding, the latter paragraphs of Article 5 of the Indian Agreement which can deem an enterprise to have a permanent establishment must also be considered to resolve the question. On the above facts, Article 5(3) of the Indian Agreement has no application. Article 5(4) of the Indian Agreement provides a list of exceptions to the definition which relevantly includes that an enterprise will not be deemed to have a PE merely because it has the use of facilities solely for the purpose of the storage of goods and/or maintains stock for the purpose of storage. Article 5(5) of the Indian Agreement deems there to be a PE, in certain circumstances, where a person, other than an agent of independent status to whom Article 5(6) of the Indian Agreement applies, acts on behalf of the enterprise. However, Article 5(6) of the Indian Agreement provides that an enterprise shall not be deemed to have a PE merely because it carries out business in the other state through an agent of independent status where that person is acting in the ordinary course of that person's business. Potentially the only relevant circumstance for the purposes of Article 5(5) of the Indian Agreement in respect of the activities of the TPL provider is at subparagraph (b) which is as follows: the person has no such authority [to conclude contracts on behalf of the enterprise], but habitually maintains in that State a stock of goods or merchandise from which the person regularly delivers goods or merchandise on behalf of the enterprise. However because the TPL provider is an independent agent acting in the ordinary course of its business in accordance with Article 5(6) of the Indian Agreement, Article 5(5)(b) of the Indian Agreement will not deem the taxpayer to have a PE in Australia. On the facts, Article 5(5) of the Indian Agreement has no application in respect of the liaison person but notwithstanding; Article 5(6) of the Indian Agreement would apply because the liaison person is an independent agent acting in the ordinary course of his own business. Article 5(7) of the Indian Agreement makes it clear that even if the taxpayer controls the TPL provider who is carrying out business in Australia, this will not in itself result in a PE for the taxpayer in Australia. In summary therefore, the taxpayer does not have a permanent establishment in Australia pursuant to Article 5 of Schedule 35 to the Agreements Act.

Legislative references: International Tax Agreements Act 1953 Schedule 35 Schedule 35, Article 5 Schedule 35, Article 5(1) Schedule 35, Article 5(2) Schedule 35, Article 5(3) Schedule 35, Article 5(4) Schedule 35, Article 5(5) Schedule 35, Article 5(6) Schedule 35, Article 5(7)
Related public rulings and determinations: Taxation Ruling TR 2001/13 | Taxation Ruling TR 2002/5
Other references: Commentary on Article 5 of the OECD Model Tax Convention on Income and on Capital, 2005 version
Subject references: Double tax agreements India International tax Non resident companies Permanent establishment