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No service PE by considering only solar days of services rendered in India

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No service PE by considering only solar days of services rendered in India

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Bangalore Income Tax Appellate Tribunal (“ITAT”) in the case of a company resident of Saudi Arabia (“the Assessee”), dealt with the issue of taxability of income for rendering services in India, under the India-Saudi Arabia Double Taxation Avoidance Agreement (“DTAA”).

Placing reliance on the Mumbai ITAT’s decision in Clifford Chance v. DCIT1, the ITAT ruled that for the purpose of computation of threshold for service permanent establishment (“Service PE”), solar days need to be considered, not man days.


The Assessee received income from an Indian company by rendering certain services through four engineers sent to India. The engineers spent more than 360 man days individually, but their collective stay in India was 90 days only. The Indian company paid the Assessee for services provided by the engineers in India. While filing the return of income in India, the Assessee claimed that income from services to the Indian company were in the nature of FTS and, in the absence of a provision on FTS under the DTAA, such income is not taxable in India.

Reliance was placed on the Madras High Court ruling in the case of Bangkok Glass Industry Co. Ltd. v. ACIT2 in this regard. Furthermore, by placing reliance on the Mumbai ITAT’s decision in the case of Clifford Chance (supra), it was contended that only solar days should be considered for the purpose of determining the existence of a service PE. Accordingly, as the presence of engineers in India was less than 182 solar days, no service PE was created.

On the other hand, the Tax Authority was of the view that the Assessee’s income was taxable in India as “royalty” under the Income-tax Act (“the Act”), as well as the DTAA. Furthermore, a Service PE is created when aggregate man days (360) of stay of the engineers in India are considered. Reliance was also placed on a recent ruling of the Bangalore ITAT (supra) to contend that the physical presence of the employee is not essential, as services can be rendered through various virtual modes. Aggrieved, the Assessee filed an appeal before the ITAT.

In the present case, as the presence of the Assessee’s engineers in India was for less than 182 days (i.e., only 90 solar days), there was no service PE created under the DTAA. The ITAT observed that the Assessee did not render any other service in virtual mode and all the services were rendered by the engineers who were physically present in India. To that extent, a previous decision of the Bangalore ITAT3 on the constitution of a service PE for services rendered virtually, as well as physically, was distinguished on facts. Furthermore, it was held that in the absence of the “Fees for Technical Services” (FTS) Article in the DTAA, income shall be covered under the “Other Income” Article, such that it is taxable only in Saudi Arabia. ITAT rejected the contention of virtual PE application in the absence of services rendered virtually.



This ruling reiterates the accepted principle that for the purpose of calculation of threshold for constitution of a service PE, solar days, and not man days, should be considered.

However, an interesting aspect is that in the absence of the FTS Article under the DTAA, while the ITAT has ruled that the “Other Income” Article shall be applicable, assessees may have to evaluate their facts to invoke decisions in the cases of ACIT v. Paradigm Geophysical Pty Ltd.4 and Tekniskil (Sendirian) Berhard v. CIT5, wherein the view had been expressed that FTS is general business income and that, in the absence of a specific FTS Article, the same should be covered within the purview of "business profits" and taxable only if attributable to PE in the source country. In the present case, no taxation was triggered in India under the “Other Income” Article of the DTAA, which allocates exclusive taxation rights to the country of residence, but the conclusion may be different it the “Other income” Article grants taxation rights to the source country.

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