BEFORE THE AUTHORITY FOR ADVANCE RULINGS NEW...
Transcript of BEFORE THE AUTHORITY FOR ADVANCE RULINGS NEW...
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Saudi Arabian Oil Company
BEFORE THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI
31st Day of May, 2018
A.A.R. No 25 of 2016
PRESENT
Mr. R S Shukla, In-Charge Chairman Mr. Ashutosh Chandra, Member (Revenue)
Name & address of the Applicant
: Saudi Arabian Oil Company 1 Eastern Avenue P.O. Box 5000 Dhahran 31311 Saudi Arabia
Present for the Applicant : Mr. S. Ganesh, Sr. Advocate
Mr. Shatanik Chakraborty, Advocate
Mr. Akhil Sambhar, CA Mr. Vinay Aggarwal, CA
Present for the Department : Ms. Kavita Pandey, CIT (DR)
Mr. Sanjay Pandey, Addl.CIT Ms. Mamta Singh, ACIT.
RULING
(By Ashutosh Chandra)
Saudi Arabian Oil Company (Saudi Aramco or the Applicant) has filed an
application under section 245Q(1) of the Income tax Act, 1961 (the Act), in Form
34C, on 12.05.2016 and the same was admitted on16.08.2016.
2. As per the Applicant, it is a state owned oil company of the Kingdom of
Saudi Arabia and a fully integrated global petroleum and chemical enterprise. It is
the world’s largest crude oil exporter producing roughly one in every eight barrels
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of world’s oil supply. The headquarters of the company are in Dhahran, Saudi
Arabia, and is a tax resident of Saudi Arabia.
2.1 Its operations span the globe and include oil exploration, production,
refining, chemicals, distribution and marketing. All these activities of the company
are monitored by the Saudi Arabian Ministry of Petroleum and Mineral Resources
together with the Supreme Council for Petroleum and Minerals. India is one of
the biggest markets for Saudi oil, and Saudi Arabia has been the top supplier to
India for the past many years starting in April 2001, according to the government
data.
2.2. Presently, Saudi Aramco is making offshore crude oil sales to Indian
refineries like HPCL- Mittal Energy Limited, Hindustan Petroleum Corporation
Limited etc., from outside India such that the title to such crude oil passes to
customers outside India on a Free on Board (‘FOB’) basis; and payment is
received by Saudi Aramco in a designated bank account outside India. All crude
oil sales are completed by Saudi Aramco from outside India and it does not have
any office in India.
2.3 To expand its India operations and for having a long term presence, Saudi
Aramco has established a Subsidiary company in India viz. Aramco Asia India
Private Limited (Aramco India), incorporated and registered under the Indian
Companies Act, in 2013. Though the primary object of the new entity is to
provide procurement support services, it would also create awareness about
Aramco and Saudi Arabian crude oil amongst crude buyers and refineries in
India.
2.4 The Applicant proposes to set up a support team in Aramco India which
will closely coordinate and extend required support to Saudi Aramco’s Crude Oil
Sales and Marketing Department (COSMD) for providing business support/
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marketing support function. However, it is mentioned that with regard to the
negotiation of the material terms or conclusion of contracts with Indian customers
as well as signing of such contracts for or and on behalf of Saudi Aramco, such
activities will only be carried out by Saudi Aramco’s own employees based in
Saudi Arabia. Aramco India, however, will only provide certain support in
furtherance of the above sales operations. It will be helping in strategic sourcing
and registration of major Indian oil and gas equipment manufactures and
engineering procurement and construction (EPC) contractors, performing
engineering and inspection evaluations, and plant audits for identified
manufacturers and suppliers. It will also be supporting Saudi Aramco and other
group companies with any additional material supply support.
3. On the above facts, the Applicant has sought a Ruling on the following
question:
“Based on the nature of business support/ marketing support activities proposed
to be undertaken by the Indian affiliate entity viz. Aramco Asia India Private
Limited (hereinafter “Aramco India”), as listed in the Statement of relevant facts
(Annexure III), would Aramco India create a Permanent Establishment (“PE”) for
the Applicant in India under Article 5 of Double Taxation Avoidance Agreement
between India and Kingdom of Saudi Arabia (hereinafter “India-Saudi Arabia
DTAA”), where such activities of Aramco India are duly compensated on an
Arm’s Length basis in accordance with the Indian transfer pricing laws and
regulations?
3.1 The Applicant contends that the above functions of Aramco India will not
result in Saudi Aramco having a PE in India under of Article 5 of India-Saudi
Arabia Double Taxation Avoidance Agreement (DTAA). To avoid repetition and
overlap, the Applicant’s arguments shall be taken up when we consider the
issues raised by the Revenue.
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4. Even though this application was admitted by this Authority on 16.08.2016,
after considering all facts and circumstances, the Ld. CIT (DR), Mrs Kavita
Pandey, speaking for the Revenue has submitted detailed arguments to say that
the same is not maintainable and no Ruling regarding the existence or otherwise
of a PE can be given. The reasons given for this stand are, briefly, as under:
4.1 There is no transaction at present which can be examined for the purpose
of giving the Ruling, as required by section 245N(a)(i). Aramco India, has not yet
started any operations in India and its roles and functions are still to be finalised.
No details of the services have been provided. Clause (c) to Para 1 of the
Services Agreement indicates that the scope is open-ended, whereas as per
section 245S there should be a specific transaction. Cases of Royal Bank of
Canada, AAR 816 of 2009, Ms Meenu Sahi Mamik, 206 CTR, AAR, 396 of 2006
and Trade Circle Enterprise LLC, AAR 1242 of 2012 have been cited.
4.2 The Applicant has suppressed the Original Service Agreement of
01.08.2016, and is seeking to sever the Proposed Addendum from the Original
Service Agreement whereas they are the same agreement as per Clause 11.
4.3 Aramco India has not complied with the necessary filings such as the
Balance Sheet, Profit and Loss Account of the Subsidiary and of India segment
of the Applicant; Audit Reports, TP Audit Report/Document, Various Agreements
with the Indian Subsidiary/purchasers/ in India, employees details etc. Only
“Saudi Arabian Oil Co., Indian Transfer Pricing Planning Documentation” for
Financial year 2015-16, dated 05.05.2015 was filed, which is not u/s 92D r/w
Rule 10D of the IT Act. The business profit of the Applicant from India has also
not been provided.
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4.4 As per an earlier Ruling of the AAR dated 12.03.2010 in respect of Aramco
Overseas Company BV (AOC), the Applicant already has a business presence in
India, with similar services. Then also, due to insufficient details, the AAR could
not give any finding on section 9(1)(b). Terms of acquisition etc. should be
furnished if that entity has been taken into Aramco India.
5. Senior counsel for the Applicant, Mr S Ganesh has strongly argued against
the view taken by the Revenue, as regards maintainability. He stated that the
Revenue’s stand runs against the intent of Chapter XIX B which consists of
sections 245N to 245V, with the objective of avoiding litigation and promoting
better taxpayer relations, as is clearly evidenced from the budget speech for
1992-93 as well as 1993-94, delivered by the then Hon’ble Union Finance
Minister. It was clarified that through this Authority the government would be
providing certainty about the tax liability in respect of intended transactions, that
is proposed transactions, or future transactions for non-resident applicants.
Reference has been made to our Handbook to say that we are concerned with
the treatment and consequences of contemplated future actions or transactions.
Further, in the FAQs it has been clarified that a non-resident can apply for
advance ruling even before taking up a transaction in India. Similar provisions
exist in many countries, including Canada and Mauritius.
5.1 Attention has been drawn to Section 245S(2) to say that Advance Ruling
is based on the statement of facts given by the Applicant in relation to the
transaction it has entered into or proposes to enter into, and it will have no
binding effect on the Revenue authorities, should they find that the facts
pertaining to the transaction actually differ. A conjoint reading of Sections
245N(a)(i) read with Section 245S(1) makes it clear that only “transaction” and
“proposed transaction” on which ruling has been sought would get covered and
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would be binding on the parties mentioned in Section 245S(1) of the Act. As per
Section 92F(v), even if not written, the term “transaction” would be covered under
section 245N(a)(i). It is to be noted that it is not a judgment in rem, but rather a
judgment in personam; that is, the ruling applies on a case-by-case basis, not
universally. In support of its contentions the Applicant has taken support from the
cases of Danfoss Industries Pvt. Ltd. (AAR No. 606 of 2002); Cable & Wireless
Networks India Private Limited (A.A.R. No. 786 of 2008); ABB Limited (AAR No.
834 of 2009),and Areva T&D India Limited (AAR No. 876 of 2010).
5.2 Regarding the activities it is submitted that Aramco India has already
started operations in India during FY 2016-17 and is rendering (a) Procurement,
Sourcing and Logistic Support; and (b) Quality Inspection Support services to the
Applicant and other affiliates in pursuance of the Service Agreement dated
01.08.2016. The Services Agreement contains the detailed description of such
services rendered by Aramco India. Clause 2, “Scope of Services” of the
Proposed draft of 1st Addendum to Services Agreement dated 01.08.2016 clearly
defines the proposed scope of services that the Applicant wishes to seek from
Aramco India. Its entire intent and purpose in setting up Aramco India have been
disclosed in the application itself.
5.3 Regarding the cases cited by the Revenue, it is stated that in Royal Bank
of Canada (supra) the transaction for which the ruling was declined by the
Authority had the tendency to abode two different attributes - Index Arbitrage
Trading and Hedging Activity, and further due to a contradictory pronouncement
earlier given by the Authority. Unlike in Ms Meenu Sahi Mamik (supra), the
Applicant in the present case has placed on record detailed Proposed draft of 1st
Addendum to Service Agreement and meticulously outlined the precise and
specific transactions for which the Ruling is being sought by the Applicant. Trade
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Circles Enterprises LLC is also not applicable as in case of the Applicant, the
agreement with Aramco India is not merely in existence but has recorded
operations as well for the preceding Financial Year and is not fictional.
5.4 It is stated that it has itself filed a copy of the original Services Agreement
dated 01 August 2016 and also a copy of the Proposed Addendum. Further, the
Proposed Addendum itself specifically states that it is in pursuance of clause 1(c)
of the Original Service Agreement. There is no suppression of facts. Regarding
non furnishing of documents, returns etc. it is stated that the time limits for the
compliances cited by the Ld. DR in her arguments have not yet expired. In any
event, the same has no relevance to the question on which the Advance ruling is
being sought by the Applicant.
5.5 It is submitted that the quantum of remuneration allowed to the PE has no
bearing on the issue as to whether a PE exists or not. In Morgan Stanley
Judgment (292 ITR 416) at pages 442 & 443 (paras 32 & 33) it has been laid
down that where a PE is found to have been remunerated on Arm’s Length Price
(“ALP”) basis, then there is no further scope for attribution of income to the PE,
whereas in the present Application, we are only concerned with the existence of
a PE.
5.6 Regarding the Revenue’s contention that the Applicant already has a
business presence in India through the branch office of its subsidiary, namely
Aramco Overseas Company BV (“AOC”), it is submitted that this is completely
misplaced as AOC was an independent affiliate entity engaged in undertaking its
business activities in India through its branch office. This is a new and separate
entity. Unlike that case, in this case the relevant agreements in respect of which
the Ruling is being sought were already placed on record, before it was admitted.
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5.7 In conclusion it is submitted that if the Revenue’s objection is upheld, the
basic object of setting up the AAR would itself be totally frustrated because then,
there would be hardly any case at all where the AAR could be approached for a
ruling. In any event, the maintainability of the Application has already been
upheld by this Hon’ble AAR by its order dated 16 August 2016 and that issue
cannot be raised again at this juncture, as laid down by the Hon’ble Andhra
Pradesh High Court in the case of Sanofi Pasteur (supra).
6. We have considered the above arguments with reference to the Revenue’s
objections on maintainability of the application. At the very outset we may state
that this application was admitted by this Authority on 16.08.2016 after due
deliberations during the proceedings under section 245R(2) of the Act, on the
basis of the details available in the application, including the Service Agreement
and the Proposed Addenda, on which the question posed to us is framed. We
are somewhat dismayed that the Revenue should still insist that the application is
not maintainable or that no ruling can be given, as there is no transaction. The
Revenue fails to understand that the very purpose of introducing Chapter XIXB
and setting up this Authority was giving a ruling in advance to remove uncertainty
in the mind of an applicant and eliminate possibility of dispute regarding the tax
issues surrounding a proposed or intended transaction, even before the
transaction or a dispute occurs. When the provisions of section 245N(a)(i) are
read with section 245S(1) it becomes clear that not only a “transaction” but also a
“proposed transaction” on which ruling has been sought would get covered. The
provisions, the clarifications at the time of inserting this Chapter and subsequent
clarifications in our Hand Book are clearly indicative of this position, as
mentioned by the Applicant.
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6.1 The Services Agreement and the Proposed Addendum form the basis on
which the activities of the Applicant are being/will be conducted. The Applicant
has submitted that while the activities of procurement have started just about a
year back, support services as per the Proposed Addendum will be started after
getting clarity through this ruling. This explains why many of the reports, returns,
details etc. as mentioned by the Revenue are not made available before us.
6.2 The Services Agreement gives full and precise details of the services
regarding procurement which are already being provided, and Clause 2 of the
Proposed Addenda (Scope of Services) gives details of the proposed services to
be provided to the Applicant by Aramco India. It is clear that the services will be
provided by a support team in Aramco India, as they mainly relate to market
research and collection of data, with which the local employees of Aramco India
would be familiar. As and when the full fledged activities start this can always be
ascertained by the Revenue to look for any breaches in the provisions of the
Agreement or the DTAA, in which case this Ruling would not apply.
6.3 It is incorrect to say that the Applicant has sought to suppress the Services
Agreement. The entire agreement has been placed on record, as also the
Proposed Addenda which is a follow up of Clause 1(c) of the Services
Agreement, which was on record when the application was admitted under
section 245R(2). Clause 11 also speaks of the entire agreement being one.
6.4 As regards the reference to our earlier ruling of 12.03.2010 in Aramco
Overseas Company BV, (AOC), unlike that case, in the present case the
Services Agreement and the Proposed Addenda were filed and duly considered
before admitting the application. Once this new subsidiary has come into
existence, with a new set of agreements with the parent, we are not concerned
with any earlier branch office.
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6.5 We are unable to get any support from the cases cited by the Revenue as
the facts are materially different. In the present case the agreements are very
much on record, there are concrete and clearly outlined details of services, some
of the activities have already commenced, and there is nothing fictional. On the
other hand we have numerous cases where we have entertained and admitted
cases on a similar footing, such as those of Danfoss Industries Pvt. Ltd. (AAR
No. 606 of 2002); Cable & Wireless Networks India Private Limited (A.A.R. No.
786 of 2008); ABB Limited (AAR No. 834 of 2009), and Areva T&D India Limited
(AAR No. 876 of 2010), to cite a few.
6.6 In any event, the maintainability of the Application has already been upheld
by this Hon’ble AAR by its order dated 16 August 2016 and that issue cannot be
raised again at this juncture. We take support from the case of Sanofi Pasteur,
354 ITR 316, wherein the Hon’ble Andhra Pradesh High Court held, at pages
173-180, as under:
“judicial and quasi-judicial authorities exercising jurisdiction under a legislative
grant have no inherent power to review their decision. Since the several
precedents cited reiterate an established norm, we avoid an idle parade and
detailed analyses of familiar authority. In view of the settled position, the
decision of the learned AAR (in the impugned ruling - set out in paragraphs 30
and 31 thereof), reviewing its earlier decision (admitting the applications) dated
17-12-2009, reiterated on 08-07-2010, is unsustainable and so declared.”
Thus, where an application for Advance Ruling was allowed by the AAR under
Section 245R(2) recording a clear finding that the application is not triggered by
any of the three provisos envisaged therein, and this Authority found no reasons
to revoke the application of the Applicant and posted the same for hearing on
merits, we are not inclined to revisit our earlier order dated 16 August 2016 to
admit the application. Therefore, contentions of the Revenue as regards
maintainability of the present application are not accepted.
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7. As proceedings on the questions raised before us started, the Revenue
insisted that we should not consider the Proposed Addendum alone, as
mentioned in the question posed to us, since the same was an integral part of the
Services Agreement, and all the services, whether related to the Services
Agreement or to the Proposed Addendum, should be considered together to
determine as to whether the applicant has a PE in India.
7.1 We agree with this plea made by the Revenue. The powers of the
Authority in dealing with the questions posed before it are contained in Rule 12 of
the Authority for Advance Rulings (Procedure) Rules 1996. This Rule provides:
‘Rule 12- Questions contained in the application.
12. The Applicant shall not, except by leave of the Authority, urge or be heard
in support of any additional question not set forth in the application, but in
deciding the application the Authority shall at its discretion consider all aspects
of the questions set forth as may be necessary to pronounce a ruling on the
substance of the questions posed for its consideration.’
Thus, the Authority has not only the power but the duty to look at ‘all aspects of
the questions set forth’ which would enable it to pronounce a ruling ‘on the
substance of the questions posed for its consideration’. Proceeding on the
assumption that one part of the agreement has no bearing on the other would be
a highly untenable proposition, especially as in the present case we find that the
Proposed Addendum is a part of the Services Agreement, especially as laid out
in clause 11, even though comprising of a different set of services. Though the
Ld. Sr. Counsel for the Applicant has maintained throughout that only the
Proposed Addendum, on which the question is framed, is required to be
examined, he has furnished detailed responses in respect of both during the
course of these proceedings, which have been examined.
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8. Let us now come to question. The Revenue has submitted detailed reports
to say that the Applicant has all the three PEs stipulated in Article 5 of the India-
Saudi Arabia DTAA, when seen in the light of the Agreements entered into on
01.08.2016. We shall take up the Revenue’s general observations here, the
specific ones shall be taken up later when we examine the response of the
Applicant, for the purpose of proper linkage, and to avoid repetition.
8.1 The Revenue has strongly contended that the Applicant has a PE in
Aramco India, its subsidiary, through which it conducts its business by setting up
a support team. Also it controls the activities of the PE through its Directors, Mr.
Ibrahim Qassim K. Albuainain, Mr. Hassan Jumman H Alghamdi and Mr. Khalaf
Khalifa A AI Awwad, who are Saudi Arabian nationals.
8.2 It is stated that Mr. Ibrahim Qassim K. Albuainain, one of the Directors of
the Indian Company lives in Beijing, China, and his occupation has been
mentioned to be “Employment” in a website accessed by the Revenue. As per
the website he was also the Chief Executive of its trading arm. In November
2014 Saudi Aramco named him head of Saudi Aramco’s Asian operations and
before that he was in charge of Saudi Aramco’s global energy investments, as
Head of Transaction Development. He was also CEO of its Energy ventures.
When he is allowed to hold Board meetings through video conferencing as per
para 12.6 of Articles of Association and he is a part of higher management of
Aramco Saudi, he controls the functions of Aramco India. Revenue refers to Para
12.1 also which stipulates that the control of the company vests in the Board of
Directors or the committee of Directors.
“12.1. Subject to the provisions of the Act and these articles, the powers
and the control of the Company shall vest in the Board, who may delegate
such powers or any part thereof to any Director or a committee of Directors.”
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Further, para12.16 of the Articles of Association reads as under:
“Para 12.16: Subject to the provisions of the Act and upon the necessary
disclosure being made by the concerned Director(s), the Board may enter into
contracts on behalf of the Company in which the Company’s Director(s) may
be interested.”
8.3 Referring to the other two Directors also, Revenue states that it was
observed from the website dated 3 April 2014 that Mr. Hassan Jumman H
Alghamdi was head of Aramco Asia-China Finance Division, and is in charge of
petrochemical sales and marketing, as well as office expenditures. With regard to
Mr. Khalaf Khalifa A Al Awwad, the information available on the website dated
April 2, 2015, was that he was the Director of Aramco Overseas Company B.V
and is the Director of Aramco India Pvt Ltd. He is approving and signing various
contracts. Hence, Aramco India is submitted to be the Agency PE of Aramco
Saudi.
8.4 With regard to paras 12.1, 12.2 and 12.5 of the Articles of the Association
of the Indian subsidiary it is stated that the power and control of the company
shall vest in the Board which may delegate such powers to any Director or a
committee of Directors; make regulations and that they shall hold office unless
they voluntarily resign.
8.5 The Revenue argues that from the above clauses it becomes clear that the
entire control and management of the company vests in the Board of Directors
and the Directors of the Company can enter into contracts. Since, all the
functions of the Indian Subsidiary are under the control and management of
Saudi Aramco, the place of business of Indian Subsidiary is the fixed place PE of
Saudi Aramco. Further, since the activities of the Indian subsidiary are carried
out for the purpose of business of Saudi Armco influenced by the services,
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control and management of the above mentioned Non-Resident Board of
Directors, the Indian Subsidiary constitutes Service PE as well. Again, by
referring to para 5 of Article 5 of the India-Saudi Arabia DTAA it is submitted that
since the Indian subsidiary carries out the business functions of Saudi Aramco
through the above mentioned Boards of Directors, it habitually exercises in India
the authority to control the contract in the name of the enterprise and also
habitually obtains orders in India, and as such is an Agency PE of Saudi Aramco.
8.6 However, the Revenue has also stated, with reference to the Directors,
that the period of stay in India, terms of appointment, list of functions discharged,
their association with ventures / entities of the Group other than the Indian
Subsidiary etc. are relevant for determining the existence or otherwise of the PE
of Aramco Saudi, but have not been furnished, though considered necessary in
the decision of Hon’ble Supreme Court in the case of Morgan Stanley wherein
the issue of lien of the Deputationist / Employee over the parent company was
considered material for determination of Service PE.
9. The Applicant has vehemently opposed and denied the picture presented
by the Revenue during the course of these proceedings and in its written
submissions.
9.1 As regards the issue of Directors raised by the Revenue, which according
to it cuts across all the three types of PEs, it is stated during the course of
hearing, that the above mentioned personnel are no longer employees of Saudi
Aramco and solely discharge services for Aramco India only. Hence it is incorrect
to say that they control Aramco India on behalf of Saudi Aramco and that these
Directors are its agents. As regards one of the Directors, Mr Ibrahim Qassim K.
Albuainain being a resident of Beijing, China and that the management of
Aramco India is controlled from outside India, it is submitted that this fact is
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irrelevant for determining the existence of a Service PE under Article 5(3)(b) of
the DTAA. As explained clearly in the E-Funds judgment, 86 taxmann.com 240
(SC), a Service PE cannot be said to exist unless the foreign enterprise renders
services in India through its employees to the customers of the foreign
enterprise. In the instant case, the Applicant is only receiving services and not
rendering any services. In any event, the Director of Aramco India who resides in
Beijing is not an employee of the Applicant, and this Director cannot be said to be
rendering any services to any customer of the Applicant in India. Hence, no
Service or Agency PE can possibly be said to exist in the present case. Similar is
the position with regard to the other Directors.
9.2 For each of the 3 possible PEs, the Applicant has responded as under:
9.2.1 Fixed Place PE
This is covered by Article 5(1) of the DTAA, and there are three requirements
which have to be conjunctively established in order that a Fixed Place PE can
exist. Firstly, there must be a specific identifiable fixed place of business in India;
secondly, that fixed place must be put at the disposal of the foreign enterprise;
and thirdly, the foreign enterprise must carry on its main business activity through
that fixed place of business. Reference in this regard has been made to the
decisions of the Hon’ble Supreme Court of India, in the Formula One case, 394
ITR 80 (SC), and also in the E-Funds case, 86 taxmann.com 240 (SC).
9.2.2 It is further submitted that the mere existence of a 100% subsidiary
company in India does not give rise to a Fixed Place PE, as specifically laid down
by Article 5(8) of the DTAA. Mere rendering of services by an Indian subsidiary to
a foreign enterprise on a principal-to-principal basis, can never give rise to a
Fixed Place PE, irrespective of how useful and how valuable these services
might be to the foreign enterprise. Just by rendering of services, the premises of
the Indian subsidiary cannot possibly be considered to be put at the disposal of
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the foreign enterprise, as required by Article 5(1). It is submitted that in this case
it is rather the Indian subsidiary which is utilizing its premises to render services
to the foreign enterprise on a principal-to-principal basis. It is the business of the
Indian subsidiary which is being carried on and not the business of the foreign
enterprise through the Indian company. It is stated that Aramco India will use its
own premises through which its own business is already being carried on to
render services envisaged in the original Service Agreement. Also, the Indian
affiliate enjoys exclusive control over such premises. These premises have not
been put at the disposal of the Applicant.
9.2.3 It is submitted that even a conjoint reading of the Proposed Addendum
with the original Services Agreement, as insisted upon by the Revenue, will not in
any event result in a Fixed Place PE coming into existence. The fact that Aramco
India is, under the original Services Agreement rendering Procurement, Sourcing
and Logistics Support; and Quality Inspection Support services to the Applicant
in connection with the equipment and goods purchased by the Applicant from
various Indian suppliers, is completely irrelevant in the context of whether a Fixed
Place PE exists, in the absence of the fulfillment of the fundamental requirements
of this kind of PE, as spelled out in Article 5(1) of the DTAA. In respect of
services under the original Services Agreement, the premises of the Indian
affiliate are being used by itself for conducting its own business and these
premises are at the disposal of Aramco India only.
9.2.4 It is stated that, without prejudice, and in any event, Article 5(4)(d)
expressly excludes from Fixed Place PE, a place of business in India which is
used by a foreign enterprise to procure goods from India (i.e. even if a foreign
enterprise maintains a physical office in India for purchase related services, such
office is not considered as a fixed place PE because of the specific exclusion).
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Hence, even if the Services Agreement is taken into consideration, there will be
no Fixed place PE.
9.3 As regards Service PE, the Applicant submits that this concept is covered
by Article 5(3)(b) of the DTAA. This requires, firstly, the rendering of services by
the foreign enterprise; secondly, such rendering of services must be in India to
the customers of the foreign enterprise; and thirdly such services must be
rendered through employees of the foreign enterprise or other personnel who
have been specially engaged by the foreign enterprise for this purpose. The
Hon’ble Supreme Court in the Morgan Stanley (292 ITR 416) and again in E-
Funds, 86 taxmann.com 240 (SC), has explained this concept.
9.3.1 As per these decisions the essential ingredients of a Service PE are
neither to be found in the original Services Agreement nor are they present in the
Proposed Addendum. It is argued that in the present case, there are no services
whatsoever which are proposed to be rendered by the Applicant to anybody at
all. On the contrary, there are only services to be rendered to the Applicant, and
not by the Applicant. Even these services are not to be rendered to any customer
of the Applicant in India, but are to be rendered to the Applicant itself.
9.3.2 It is further stated that as held in the E-Funds Judgment (SC), (supra), a
Service PE cannot be said to exist unless the foreign enterprise renders services
in India through its employees to the customers of the foreign enterprise. No
such case has been made out by the Revenue. In fact as mentioned above, in
the instant case, the Applicant is only receiving services and not rendering any
services. Further, the Director of Aramco India who resides in Beijing is not an
employee of the Applicant, and in any case he cannot be said to be rendering
any services to any customer of the Applicant in India.
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Hence, the Applicant submits that no Service PE can possibly be said to exist in
the present case.
9.4 Regarding Agency PE, the Applicant states that this is dealt by Article 5(5)
(a), (b) and (c) of the DTAA. The Revenue has referred to clause (c) of Article
5(5). The ingredients of an Agency PE under Article 5(5)(c) are that firstly, the
Indian entity must be acting as the agent of the foreign enterprise, that is to say,
the Indian entity must be acting for and on behalf of the foreign enterprise and
must represent the foreign enterprise in dealings with third parties; and secondly,
the Indian entity must be habitually obtaining orders for the foreign enterprise. On
this issue also the Applicant has taken support from the decisions in Morgan
Stanley (SC) (supra) and E-Funds (SC) (supra) case. It is stated that none of
these features are present in the instant case, and that Article 3 specifically
precludes Aramco India to act as an agent or even enter into negotiations with
any person or accept orders on behalf of the Applicant.
9.4.1 In view of the above there is no possibility of the existence of an Agency
PE under Article 5(5). It is stated that the services embodied in the Proposed
Addendum require the Indian Affiliate to create awareness about the Applicant
through various channels and essentially partake of the nature of image
projection and intelligence gathering which in no event and under no
circumstances will tantamount to any activity covered by Article 5(5) of the DTAA.
9.4.2 Reference has been made to the Protocol to the India – US DTAA to state
that the concept of “obtaining orders” has been clearly explained in the Protocol
to the India - USA DTAA (pages 19-20 of the application) to mean orders which
straightaway bind the foreign enterprise the moment they are accepted by the
Indian entity. But Aramco India has been specifically debarred by Clause 3 of the
Proposed Addendum from engaging in any such activity. It is submitted that even
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under the original Services Agreement, Aramco India is not permitted to conclude
contracts on behalf of the Applicant. A perusal of the services stated in the
agreement would make it abundantly clear that Aramco India primarily assists in
identifying vendors in India, coordinating with them and undertaking quality
checks etc. of materials being exported from India. Hence, the primary condition
laid down by Article 5(5) will still not be satisfied.
9.4.3 Without prejudice, it is stated that even where such purchase contracts
were to be concluded by Aramco India, it will still not result in creation of a PE as
the “orders” referred to in Article 5(5)(c) are sales orders for the sale of the
products of the foreign enterprise and not purchase orders for goods purchased
by it for its internal operations.
9.4.4 In this connection, reliance has been placed by the Applicant on the
following judicial precedents to say that the proposed business support /
marketing support activities would not result into constitution of Agency PE in
terms of Article 5(5) of the DTAA: DDIT vs B4U International Holdings Ltd. (ITA
No. 880/Mum/2005) (Mumbai ITAT) and upheld by the Bombay HC (2015) 374
ITR 453 (Bom); e-Bay International AG v ADIT (ITA No. 6784/M/2010) (Mumbai
ITAT); and DDIT vs Daimler Chrysler A.G. (ITA No. 9211/Mum/2004) (Mumbai
ITAT).
9.5 Regarding the original Services Agreement the Applicant has pointed out
that they only provide support services which would facilitate the Procurement,
Sourcing and Logistics; and Quality Inspection Support for purchasing certain
goods and equipment from various suppliers in India, and there is a specific and
total exclusion of such services by Article 5(4)(d) and (e) of the DTAA. These are
very different from the services proposed to be rendered by Aramco India under
the Proposed Addendum. Both the domestic law as well as India-Saudi Arabia
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DTAA, specifically give exception for purchase activities. Hence, even where
such activities are carried on by a branch office / liaison office of a foreign
company, such a branch office / liaison office cannot become a PE. In the instant
case, the Applicant does not even have an office in India, it is procuring such
services from its subsidiary (and is remunerating the subsidiary for it) and there is
legally no basis on how the subsidiary can constitute a PE by virtue of providing
such services. Further, Aramco India does not have the power or the authority to
conclude contracts. But for the sake of argument, even if it were to be assumed
that Aramco India does have such a power, it still cannot constitute an Agency
PE under Article 5(5) as the orders referred therein are for sales of the company
and not for purchases.
10. We now come to the specific observations of the Revenue to the different
clauses (services) in the Agreements, and the response of the Applicant.
10.1 I. Procurement & Sourcing & Logistic support: (Services Agreement of
1.8.2016).
(i) Searching for new potential procurement sources for SAO’s projects and
operations: No comments.
(ii) Identifying and registering with Saudi Aramco potential Indian
manufacturers to fulfill its sourcing needs and requirements: No comments.
(iii) Engaging with suppliers through meetings and factory visits:
Against Revenue’s comment that these activities are in the nature of
communication and negotiation, and therefore fall in the ambit of PE, the
Applicant submits that the clause is limited to engaging with suppliers through
meeting and factory visits for the purpose of Procurement, Sourcing and Logistic
support, and not in the nature of negotiations.
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(iv) Ensuring compliance of all approved suppliers with SAO’s supply chain
code of conduct:
As per the Revenue, the word “ensuring” the compliance by Indian suppliers.
Aramco India can ensure compliance only if it has authority to control the
contract. The Applicants states that is an assumption that Aramco India is having
“authority to control the contract”. The clause merely suggest that Aramco India
is entrusted with the responsibility of ensuring that all approved suppliers are
compliant with SAO’s supply chain code of conduct e.g. labour laws, etc.
(v) Following up on orders placed by SAO with the Indian suppliers;
(vi) Coordinating logistics requirements for materials exported to SAO.
(vii) Making the necessary arrangements with respect to air and marine cargo
shipments to SAO’s premises in Saudi Arabia.
(viii) Public affairs support to build and strengthen relationship with important
manufacturers, logistics companies, etc.
The Revenue states that the above 4 activities do not fall within the exception
provided in para 3 of Article 5 of Indo-Saudi DTAA. The Applicant has submitted
that Article 5(3) is in relation to constitution of Construction / Supervision /
Service PE of the non-resident. For the benefit of exceptions contained in Article
5(4) of the DTAA, it is essential that a non-resident first constitutes a PE under
Article 5(1) or 5(2) or 5(3) of the DTAA. Without establishing that there is a PE,
the Revenue is contending that the activities are not covered.
b. Quality Inspection support:
(ix) Undertaking quality assurances in connection with the evaluation of new
and existing vendors.
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According to the Revenue, these activities do not fall within the exception
provided in para 3 of Article 5 of Indo-Saudi DTAA. However, the Applicant states
that Article 5(3) is in relation to constitution of Construction / Supervision /
Service PE of the non-resident. As per Article 5(4) of the DTAA, it is essential
that a non-resident first constitutes a PE under Article 5(1) or 5(2) or 5(3) of the
DTAA. Without establishing that there is a PE, the Revenue is contending that
the activities are not covered.
(x) Controlling and inspecting quality for direct purchased orders (“POs”):
The Revenue states that one of the activities mentioned here is “controlling” the
quality of goods and services. This can happen only if the Indian Subsidiary has
authority on behalf of the foreign AE. As per the Applicant, this is an assumption
that Aramco India is having “authority on behalf of foreign AE”. The clause
merely suggests that Aramco India is responsible for controlling and inspecting
quality for goods purchased from India as part of Quality inspection support.
(xi) Monitoring quality inspection activities conducted by third party inspectors
for POs placed by contractors;
(xii) Evaluating and monitoring inspection agencies’ performance and qualifying
third party inspectors:
The Revenue states that the above two activities do not fall within the exception
provided in para 4 of Article 5 of Indo-Saudi DTAA. The Applicant submits that for
the benefit of exceptions contained in Article 5(4) of the DTAA, it is essential that
a non-resident first constitutes a PE under Article 5(1) or 5(2) or 5(3) of the
DTAA. Without establishing that there is a PE, it cannot be said that that the
activities are not covered.
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c. Such other and additional services as each party may request and the
requested party may be qualified and able to perform:
No comments.
10.2 II. Proposed Addendum dated 01.08.2016: Marketing, Liaison and
Business Supporting Function.
10.2.1 The Revenue states that these activities have very broad ambit and
definitely cannot fall within the exception provided under para 4 of article 5 of
Indo-Saudi DTAA. For example the visits of the dignitaries of Saudi Arabia show
that these are high end activities involving specialised personnel. The news
reports seem to suggest expansion of future business operations of Applicant /
Group in India. However, the Applicant states that the essential requirements for
constitution of Agency PE under Article 5(5) of DTAA are not present. It would be
inappropriate to look at business activities of Aramco India based on news
reports ignoring the Services Agreement / Proposed Addendum based on which
present ruling is being sought. As per Clause 3 of the Proposed Addendum,
Aramco India is precluded from acting as an agent or even enter into
negotiations with any person or accept orders on behalf of the Applicant.
10.2.2 The Applicant states that the Revenue has, in most instances, relied
on Article 5(4) to say that the activities are not covered in the exception clause.
As mentioned earlier, the relevance of 5(4) comes in only where a PE is
constituted under Article 5(1) or 5(3). As has been very clearly highlighted both
by the specific facts and judgement of Hon’ble Supreme Court in Formula One
and E-funds, the Applicant does not constitute a PE in India. Hence, the reliance
by the Revenue on Article 5(4) is completely misplaced.
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A. Performing market research about India’s market for crude oil, gas and
other hydrocarbons:
The Revenue says that these activities do not fall within the exception provided in
para 4 of Article 5.
The Applicant reiterates that for the benefit of exceptions contained in Article 5(4)
of the DTAA, it is essential that a non-resident first constitutes a PE under Article
5(1) or 5(2) or 5(3) of the DTAA. Without prejudice to above, considering the
profile of the Applicant company which is extraction and sale of crude oil and
natural gas which is the core business activity, performing market research
activity would be preparatory and auxiliary in nature.
B Ensuring competitiveness of Saudi crude and LPG in India by providing
monthly price recommendations, in addition to customers’ pricing feedback and
desired nominations:
The Revenue states “Ensuring Competitiveness” and further “through desired
nominations”, can happen only if the Indian Subsidiary has authority on behalf of
the foreign AE.
According to the Applicant, this is only an assumption that Aramco India is having
“authority to control the contract”. The clause merely suggests that Aramco India
is entrusted with the responsibility of providing these services. It nowhere
suggests that Aramco India has any authority to act on behalf of Applicant in any
manner.
C. Receiving communications from customers in India with respect to the
price, quantity, grade mix, lifting ports and credit provisions in SAO’s crude oil
sales and other agreements and communicating the same to SAO:
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The Revenue states that this clause mentions about the entire communication,
right from price, quantity, quality, logistics, credit policy and also “Other
Agreements”. This implies that Aramco India has to ensure compliance which
means it has the authority to control the contract.
The Applicant submits that the Indian subsidiary is to act as a communication
channel and relay information from / to Applicant and Customers. There is no
element of any sort of “authority to control the contract”. In fact as specifically
mentioned in the Proposed Addendum, the Indian subsidiary does not have any
right or authority to negotiate or conclude the contract.
D. Promoting awareness and public relations and meeting the business and
governmental organizations to gather information or make presentations:
The Revenue urges that while gathering of information may be of preparatory
and auxiliary nature but Aramco India is authorised to carry out public
relationship and make presentation before business associates including
Governmental Organisations. This cannot be of preparatory and auxiliary in
nature.
The Applicant states that the concept of preparatory & auxiliary is relevant in a
situation where a foreign company constitutes a PE and then wants to take the
benefit of the exception clause – which includes Preparatory & Auxiliary
activities. In the instant case, without proving that there is a PE of the Applicant -
the Revenue is saying that such activity would not be covered in the exception,
which is completely incorrect.
E. Arranging meetings with visitors from SAO and other affiliates with
shareholders and government officials and LPG customers in India and
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coordinating all associated logistical arrangements (such as hotels,
transportation, etc.) :
The Revenue submits that the Applicant has not provided the details of visitors
from SAO and other group companies from Dhahran, Saudi Arabia, and
Government Officials and LPG customers in India and the communication of the
employees of the Subsidiary with the employees of Aramco Saudi Group or the
visiting dignitaries. In view of the observations made in para 13-15 of the decision
of the Hon’ble Supreme Court in the case of Morgan Stanley such visits for the
purpose mentioned in this Agreement constitutes PE in India.
The Applicant responds by saying that the activity related to business support /
marketing support services has not yet been started. In fact, the Applicant wishes
to start the function only after receiving the ruling from AAR. Hence, question of
the details of personnel would not be available.
With regard to the clauses F to J in the proposed Addenda, no comments have
been made by the Revenue.
K. Supporting SAO’s Crude Oil Sales and Marking Department (COSMD)
with crude and LPG operational matters such as nominations / allocations,
scheduling and claims issues.
L. Providing customer support, namely communicating concerns of Indian
customers to SAO and thus assisting in adequate communication flow between
SAO and its Indian customers:
On the above two services, Revenue says that it shows the involvement the
Indian Subsidiary in main business operational matters.
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The Applicant opposes this view. Aramco India would only support the Applicant
with certain operational matters and provide customer support through
communication of concerns of Indian customers.
M. Protecting SAO’s market share by maintaining strong business
relationships with current customers through frequent visits, event participation
and closer networking:
The Revenue states that the Indian Subsidiary has the responsibility of
maintaining strong business relationship with the customers and there remains
no other significant activity for discharging the main business operations. Hence,
the sale in India is not a sale simplicitor.
The Applicant argues that the maintenance of business relations with current
customers is a business support function. Unless, Indian subsidiary (i.e. Aramco
India) acts on behalf of Applicant and habitually concludes contracts or obtains
orders from Indian Customer, an Agency PE in terms of Article 5(5) of India-
Saudi DTAA would not come into existence. These services are rendered as part
of its own business operations on a principal-to-principal basis.
N. Seeking and facilitating new opportunities to place additional volumes by
identifying new customers, potential JVs and expansion projects as well as new
business opportunities:
Revenue states that these activities do not fall within the exception provided in
para 4 of Article 5 of Indo-Saudi DTAA.
The Applicant again states that first it is essential that a non-resident constitutes
a PE under Article 5(1) or 5(2) or 5(3) of the DTAA. This proposed service is akin
to business support / marketing support activity relating to seeking and facilitating
new opportunities for sales and financial investments into India.
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O. Collecting information regarding governmental and business requirements,
procedures, customs, registrations and notification requirements etc., necessary
for SAO to meet the demand of Indian customers and government authorities:
No comments.
P. Acting as communication channel in relation to issues concerning
implementation of existing Sale and Purchase Agreements with Indian
customers:
These activities do not fall within the exception provided in para 4 of Article 5 of
Indo - Saudi DTAA.
The Applicant again states that first it is essential that a non-resident constitutes
a PE under Article 5(1) or 5(2) or 5(3) of the DTAA.
Q. Collecting any other ad-hoc information as may be requested by either
Party:
No comment.
11. As regards the Revenue’s view that on the issue of Compensation on
Arm’s Length Price (“ALP”), the Applicant states that the quantum of
remuneration allowed to the PE has no bearing at all on the issue as to whether
a PE exists or not. It is relevant only for the purpose of determining the amount of
profit and gains that would be attributable to the PE, if a PE is first found to exist.
The legal position in this connection has been clearly explained in the Morgan
Stanley Judgment (292 ITR 416) at pages 442 & 443 (paras 32 & 33) where it
has been laid down that where a PE is found to have been remunerated on
Arm’s Length Price (“ALP”) basis, then there is no further scope for attribution of
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income to the PE. In the present case, the Applicant is only concerned with the
existence of a PE and not with the quantum of income attributable thereto.
However it is stated that the case of Morgan Stanley has been cited only to point
out, firstly, the ingredients of a Service PE and an Agency P.E. and also for the
principle laid down in that judgement, since Aramco India is to be remunerated
on ALP basis. Reliance on this case on any other aspect is completely out of
context.
12. The Revenue has cited various paras from the decision in the case of
Morgan Stanley to say that as per that decision, with regard to Fixed place PE,
emphasis was laid upon the analysis of facts of the case to examine whose
business is being carried out through such a fixed place. But sufficient details are
not available in this case. However, analysis of the available details show that
the business of Aramco Saudi is being carried out in the premises of the Indian
Subsidiary construing the existence of fixed place PE in India. Reference has
been made to its report and paras 10 to 19 of the same to say that the business
of the applicant is being carried out from the premises of Aramco India. The
Applicant denies the same and states that all the tests laid down by Hon’ble
Supreme Court in recent judgments in case of Formula One and E-Funds are
satisfied in present case, and hence, the Applicant shall not constitute a Fixed
place PE in India.
12.1 On the issue of exceptions provided in Article 5 para 3, the Revenue states
that exclusion of PE under Article 5(3)(f) of Indo-US Treaty (equivalent to Article
5(4)(e) of India-Saudi ArabiaTreaty) provides exemption for carrying out activity
of preparatory and auxiliary nature. In Morgan Stanley, the Indian Subsidiary was
held to be carrying out activities of preparatory and auxiliary nature because the
Indian entity was carrying out back office functions, whereas in the instant case
the activities carried out by Aramco India is primary commercial activity. The
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Applicant submitted that unless a Fixed Place PE of Applicant is constituted in
India, the benefit of exception under Article 5(4) may not even need to be looked
into. Also, as an independent entity it was only carrying out support functions on
its own, and the Applicant was doing primary commercial activities from Saudi
Arabia.
12.2 Clause-2(E) of the Proposed Addendum to the Agreement dated 1.8.2016
clearly mentions that the dignitaries of SAO and other affiliates will be visiting
India and Aramco India would be arranging meeting of such visitors with
Government Official, LPG customers in India and coordinating all associated
logistical arrangements. Hence there is a PE in India. The Applicant states that
according to this decision, the Supreme Court has laid down in the E-Funds
Judgment that for a Service PE to come into existence, it is essential that the
foreign enterprise must render services to its customers in India, and further,
such services must be rendered through the employees of the foreign enterprise.
None of these fundamental requirements are even alleged by the Revenue to
exist in the present case.
12.3 Again referring to the issue of Agency PE, the Revenue states that all the
major activities pertaining to the conclusion of orders / contracts were carried out
either in India by the Subsidiary or outside India by the Directors of the Indian
Subsidiary thereby implying the existence of agency PE. The Applicant, however
submitted that it is seeking an Advance Ruling for the transaction envisaged in
the Proposed Addendum. But even under the original Services Agreement,
Aramco India is not permitted to negotiate or conclude contracts on behalf of the
Applicant. A perusal of the services stated in the agreement (as discussed
above) makes it abundantly clear that Aramco India primarily assists in
identifying vendors in India, coordinating with them and undertaking quality
checks etc. of materials being exported from India. Hence, the primary condition
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laid down by Article 5(5) will still not be satisfied. For the sake of argument even
where such purchase contracts were to be negotiated and concluded by Aramco
India, it will still not result in creation of a PE as the “orders” referred to in Article
5(5)(c) are sales orders for the sale of the products of the foreign enterprise and
not purchase orders for goods purchased by it for its internal operations.
12.4 Regarding the Revenue’s submissions on attribution of profit, the Applicant
submits that in this application, it is only concerned with the formation/existence
of a PE and not with the quantum of income attributable thereto. In any event, the
amount of the ALP and the quantum of income attributable to the PE involve
questions of valuation which cannot be raised before this Hon’ble AAR.
13. We have considered the facts of the case as submitted with the
application, and the subsequent submissions of both the Revenue and the
Applicant.
13.1 The issue on which the Applicant has sought a ruling from us is whether
the services that will be rendered to the Applicant company by its Indian affiliate
viz. Aramco India as “envisioned” in the Proposed draft of the 1st Addendum to
the Service Agreement dated 01.08.2016 will give rise to a PE, within the
meaning of Article 5 of the India-Saudi Arabia DTAA. However, as mentioned
earlier, at the instance of the Revenue, we have considered not only the
Proposed Addendum but also the main Service Agreement.
13.2 Before we discuss each of the possible PEs, let us look at the broad
picture, which has to be kept in mind and has a bearing on the discussions that
will follow. The Applicant is a state owned oil company of the Kingdom of Saudi
Arabia and the world’s largest crude oil exporter. India is one of its biggest
markets and it is making offshore crude oil sales to Indian refineries from outside
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India. It has set up a subsidiary, Aramco India, as a separate legal entity, which
is providing procurement related support services under the Services Agreement,
and will extend further support to Saudi Aramco’s Crude Oil Sales and Marketing
Department, by providing business support / marketing support functions under
the Proposed Addendum, on which the Ruling is sought.
13.3 In Vodafone Holdings International, BV, 341 ITR 1 (2012), the Hon’ble
Supreme Court had observed as under:
“66. The approach of both the corporate and tax laws, particularly in the matter
of corporate taxation, generally is founded on the above mentioned separate
entity principle, i.e., treat a company as a separate person. The Indian Income
Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of
the independence of companies and other entities subject to income-tax.
Companies and other entities are viewed as economic entities with legal
independence vis-a-vis their shareholders/participants. It is fairly well accepted
that a subsidiary and its parent are totally distinct tax payers. Consequently, the
entities subject to income-tax are taxed on profits derived by them on
standalone basis, irrespective of their actual degree of economic independence
and regardless of whether profits are reserved or distributed to the
shareholders/ participants……….Now a days, it is fairly well settled that for tax
treaty purposes a subsidiary and its parent are also totally separate and distinct
tax payers.
67. It is generally accepted that the group parent company is involved in giving
principal guidance to group companies by providing general policy guidelines to
group subsidiaries.
However, the fact that a parent company exercises shareholder's influence on
its subsidiaries does not generally imply that the subsidiaries are to be deemed
residents of the State in which the parent company resides.
Further, if a company is a parent company, that company's executive director(s)
should lead the group and the company's shareholder's influence will generally
be employed to that end. This obviously implies a restriction on the autonomy of
the subsidiary's executive directors. Such a restriction, which is the inevitable
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consequence of any group structure, is generally accepted, both in corporate
and tax laws.”
13.4 We must also mention here, as we did in our recent ruling in the case of
AB Holdings Mauritius II, AAR/1129 of 2011 dated 08.11.2017, that it would be
inconceivable that the Holding Company would not at all be involved in the
decision making of its subsidiary. Its activities have to be necessarily in
consonance with the overall goals of the holding company. It cannot be expected
that the Directors of the subsidiary would act with such independence that the
overall objectives of the holding company themselves get compromised. And
that, within the subsidiary itself, the Directors would have a persuasive influence
on its decisions. Also, with immense technological advancement in the present
world of communication, it is unrealistic to expect all the Directors, who may also
be Directors in other group companies and in other countries, to be physically
present in each and every decision making event, and communication is validly
and widely done through electronic audio and video devices.
13.5 Hence, the fact that the Applicant has established a subsidiary, Aramco
India, does not automatically make the latter a ‘permanent establishment’ of the
Applicant. Aramco India has been set up as an independent legal entity,
incorporated under the Indian Companies Act, 1956. Para 8 of Article 5 of the
India Saudi Arabia DTAA, stipulates thus:
“8. The fact that a company which is a resident of a Contracting State controls
or is controlled by a company which is a resident of the other Contracting
State or which carries on business in that other State (whether through a
permanent establishment or otherwise), shall not of itself constitute either
company a permanent establishment of the other.”
13.6 Klaus Vogel in his commentary on Double Taxation Conventions, 3rd
Edition (para 40, pg 351), referring to the above provision, states that:
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“the above follows from the principle that, for the purpose of taxation, such a
subsidiary company constitutes an independent legal entity. Even the fact that
the trade or business carried on by the subsidiary company is managed by the
parent company does not constitute the subsidiary company a permanent
establishment of the parent company”.
13.7 Hence, unless a case is made out that the Applicant proposes to carry out
its main business itself from an establishment in India, or through its employees
and personnel, or the Indian subsidiary can act as an agent of the holding
company, ie. it proposes to do acts that are specifically mentioned in the DTAA, it
cannot automatically be concluded that Aramco India would constitute a PE of
the Applicant. We shall see more specifics a little later.
13.8 The Applicant has contended in its application that its activities of support
to procurement activities of the Applicant under the Services Agreement have
commenced, and those under the Proposed Addendum would commence after
the ruling is pronounced. The agreements are dated 01.08.2016. Hence, since
Aramco India is in a nascent stage, absence of too many details in a proposed
transaction is understandable. We consider it appropriate to mention here that as
under our consideration is a proposed transaction/Proposed Addendum, the
whole exercise will focus more on examining the clauses of the Agreements as
against the provisions of the India Saudi Arabia DTAA, with the help of
commentaries and case law. This would serve the purpose for which the AAR is
set up, ie. giving certainty to the issues of taxability on the proposed transactions
of the Applicant. At the same time, whatever factual details have been gathered
and brought before us by the Applicant and the Revenue are considered at the
appropriate places.
14. Let us now examine whether the Indian subsidiary, Aramco India can
constitute a PE of the Applicant in India.
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14.1 The India - Saudi Arabia DTAA, in Article 5, envisages 3 types of PEs,
namely:
(i) Fixed Place of Business PE,
(ii) Service PE, and an
(iii) Agency PE.
It is the Applicant’s contention that none of the three PEs is formed on the
facts of the instant case. This is contested by the Revenue on various grounds,
as contained in its detailed report, discussed in the preceding paras. Let us
examine each of the possible PEs.
15. Fixed Place PE:
Under article 5(1) of the India Saudi Arabia DTAA:
“…..the term "Permanent Establishment" means a fixed place of business
through which the business of an enterprise is wholly or partly carried on”.
15.1 This definition has been interpreted time and again with reference to each
of its features, and most recently by the Hon’ble Supreme Court in the case
Formula One World Championships (supra). Para 27 of this decision reads as
under:
“27. The principal test, in order to ascertain as to whether an establishment
has a fixed place of business or not, is that such physically located premises
have to be ‘at the disposal’ of the enterprise. For this purpose, it is not
necessary that the premises are owned or even rented by the enterprise. It will
be sufficient if the premises are put at the disposal of the enterprise. However,
merely giving access to such a place to the enterprise for the purposes of the
project would not suffice. The place would be treated as ‘at the disposal’ of the
enterprise when the enterprise has right to use the said place and has control
thereupon.”
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15.2 In E-Funds (supra), the Hon’ble Supreme Court said at para 16, as under:
“16. This report would show that no part of the main business and revenue
earning activity of the two American companies is carried on through a fixed
business place in India which has been put at their disposal. It is clear from the
above that the Indian company only renders support services which enable the
assessees in turn to render services to their clients abroad. This outsourcing of
work to India would not give rise to a fixed place PE and the High Court
judgment is, therefore, correct on this score.”
15.3 The Revenue has, by referring to the case of Morgan Stanley (supra), further
added to clarify the definition, by stating that the guideline of the Hon’ble Supreme
Court was that the facts must be analysed to conclude as to who’s business is
being carried out, and that in this case it is the business of Saudi Aramco which
is being carried on from the premises of the Indian subsidiary.
15.4 Thus we find that the term ’permanent establishment’, though clear
enough by its definition, has been somewhat amplified, to infuse more clarity,
when we look at the above cited cases. When these are read together, along
with the definition provided by Article 5(1) of the DTAA, the requirements for a
fixed place PE appear to be as follows:
(i) There should be a fixed place;
(ii) That fixed place should have been placed at the disposal of the
foreign enterprise;
(iii) The main business of the foreign enterprise should be carried on
from that fixed place;
(iv) Support services or outsourcing work would not be sufficient to
make it a permanent establishment.
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15.5 The Applicant, Saudi Aramco, a state owned company, is based in
Dhahran. Its supply of oil to India is made off shore from Saudi Arabia on FOB
basis. Its main business and revenue earning activity of exploration, production,
refining, chemicals, distribution and marketing of crude oil are all carried on in
and from Saudi Arabia, and monitored by the Saudi Arabian Ministry of
Petroleum and Mineral Resources together with the Supreme Council for
Petroleum and Minerals. Hence, the question of any of its main or core business
activities, as referred to in the E*Funds case, being done from an establishment
or fixed place in India does not appear to arise.
15.6 On the other hand its subsidiary, Aramco India is incorporated in India as
an independent and separate legal entity, under the Indian Companies Act, 1956,
and is liable to file its returns of income and pay taxes on its income as per the
Income tax Act, 1961. In view of Article 5(8) referred to earlier, though being a
100% subsidiary of the Applicant, it does not automatically become a PE of the
Applicant in India. It has its own Board of Directors and is carrying out / will carry
out its activities in consonance with its objects outlined at para 1 ‘Services’ of the
Services Agreement; and at para 2 ‘Scope of Services’ of the Proposed
Addendum, respectively. These activities are carried out from its establishment in
India. In other words Aramco India is utilising its establishment for its own
business in India. And, from these premises it is providing support services to the
Applicant, for which it gets duly remunerated.
15.7 No material has been brought on record to show that the support team in
Aramco India is manned by employees or hired personnel of the Applicant, or will
be so manned in future when the activities begin. Hence, going by the Applicant’s
denial and the clauses of the agreements, it has to be inferred that the support
team is only a part of Aramco India to provide the support services and it cannot
be said that the Applicant will carry out its main business through the latter or that
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any part of the said premises has been placed by Aramco India at the disposal of
the Applicant, Saudi Aramco.
15.8 We may add here that the services carried on / to be carried on by
Aramco India, as envisioned by Saudi Aramco in the Prposed Addendum appear
to be in the nature of support services only, and do not appear to constitute the
main business of the Applicant, which is production and sale of oil, and which is
done from Saudi Arabia. As for the services rendered by Aramco India to Saudi
Aramco from its premises, for which it will be compensated on arm’s length
basis, this in itself has no bearing on whether a Fixed place PE exists or not.
15.9 We conclude the discussion on fixed place PE by saying that on the facts
of case, the Applicant cannot be said to be carrying on its main business from
the premises of its subsidiary, Aramco India, or even that such a premises had
been placed at its disposal for conducting its business. Therefore, the Applicant
cannot be said to have a Fixed place PE in India, within the meaning of para 1 of
Article 5 of the India Saudi Arabia DTAA.
16. Service PE
16.1 Para 3 of Article 5 of the India Saudi Arabia DTAA deals with Service PE,
and it goes as under:
“3. The term "permanent establishment" also includes:
(a) A building site, a construction, assembly or installation project, or
supervisory activities, in connection therewith, but only where such site, project
or activities continue for a period of more than 182 days;
(b) The furnishing of services, including consultancy services, by an
enterprise through employees or other personnel engaged by the enterprise for
such purpose, but only where activities of that nature continue (for the same on
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a connected project) within the country for a period or periods aggregating
more than 182 days within any 12-month period.”
16.2 We would be concerned with sub para (b). According the above definition,
the essential features of a Service PE are:
(a) The foreign enterprise should be rendering a service;
(b) The service should be rendered in India to the customers of the
foreign enterprise;
(c) The services must be rendered through employees of the foreign
enterprise or other personnel who have been engaged by the foreign enterprise
for this purpose; and
(d) The services should be rendered for a period aggregating to more
than 182 days, within a twelve month period.
16.3 This provision therefore goes beyond the fixed base concept. Under this,
the mere rendering of services by the foreign enterprise would make it liable to
tax in the state where the services are rendered. Usually this would happen when
the foreign enterprise is making personnel available for providing the services or
technical assistance. The portion clarifying this provision, in the decision in
Morgan Stanley (supra), which examined the India USA DTAA, reads as under:
“Article 5(2)(l) of the DTAA applies in cases where the MNE furnishes services
within India and those services are furnished through its employees.”
The decision in E-Funds, supra, (paras 17-20, pg 45-51) also elaborates
the above, as under:
“17. Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of
the DTAA is that an enterprise must furnish services “within India” through
employees or other personnel…
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18. It has already been seen that none of the customers of the assessees are
located in India or have received any services in India. This being the case, it is
clear that the very first ingredient contained in Article 5(2)(l) is not satisfied…
20. We entirely agree with the approach of the High Court in this regard.
Article 42.31 of the OECD Commentary does not mean that services need not
be rendered by the foreign assessees in India. If any customer is rendered a
service in India, whether resident in India or outside India, a “service PE” would
be established in India……..Only auxiliary operations that facilitate such
services are carried out in India.”
16.3.1 The Revenue’s contention in respect of Service PE is that the
activities of Aramco India are carried out for the purpose of the business of the
Applicant, influenced by the services, control and management of the non-
resident Directors of Aramco India.
16.4 In Article 5(3) of the DTAA, the emphasis is on rendering of services by the
foreign entity through its employees or other personnel. For this reason perhaps,
the Revenue has chosen to highlight the aspect of the Directors of Aramco India
in great detail. Following up this argument, it has referred to the case of Morgan
Stanley, to argue that the visits and activities of the employees of the Applicant
are required to be properly examined to establish the existence of a Service PE.
16.4.1 On the facts of the case, first and foremost, the conditions stipulated
in the DTAA must be fulfilled before we can examine the status of persons
mentioned by the Revenue. It has been emphasized by the Applicant that it is not
rendering any services to any customer in India, either directly or through
Aramco India. It is the Indian subsidiary which is providing support services like
market research, gathering information on pricing, ascertaining quality of crude
oil, promoting awareness, arranging meetings, maintaining databases,
information on competitors, and so on to Saudi Aramco, the Applicant, and not to
customers, and is being compensated by the Applicant, for these services. This
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appears to be somewhat opposite of what is contemplated in Article 5(3)(b), and
perceived by the Revenue.
16.5 The Revenue has stated that a Director of Aramco India, Mr. Albuainain is
a high dignitary of Saudi Aramco group and has the power to control the activities
of the Indian subsidiary. Hence, the business of Saudi Aramco group is being
carried out in India through the Indian subsidiary as the PE. Since the Directors
have been appointed for perpetuity, the prescribed period provided in para
5(3)(b) becomes applicable. Clause 2(E) of the Addendum has been referred to
say that the dignitaries of Saudi Aramco and other affiliated companies will be
visiting India and Aramco India would be arranging meeting of such visitors with
the government officials, customers in India and coordinating all associated
logistical arrangements. It is the Revenue’s contention that Mr. Albuainain, a high
official / employee of the Applicant group, is stationed in China, and as per paras
12.1 and 12.16 of the Articles of Association, as a Director, he would control the
business of Aramco India.
16.5.1 We do not find much merit in this argument. A look at the information
culled out by the Revenue from the internet (in the absence of any other source,
as the support services have not as yet commenced) shows that most of the
appointments in high positions mentioned by the Revenue are of 2014, ie. period
prior to the Agreement under consideration. The Revenue upon verification from
the internet, found that in November 2014, Saudi Aramco named Mr. Albuainain
as head of Saudi Aramco’s Asian operations. In the picture pulled out he is seen
inaugurating the Aramco Asia Singapore office in September 2014. References
to his earlier positions as CEO of Aramco group companies are noticed in the
Revenue’s submissions which pertain to the years 2011 and 2012.
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16.5.2 Similarly, reference to another Director, Mr Khalaf Al Awwad, and a
letter with the subject “Plant Evaluation” where an approval is granted, shows the
date as April 2, 2015, and is on the letter of an earlier entity Aramco Overseas
Company BV. A similar mention has been made about the third Director. This is
wholly irrelevant, since as per the Revenue’s own earlier contention that after a
re-organisation, the present Aramco India was incorporated. We are concerned
with the present entity, Aramco India, and no credence can be given to the earlier
or other entities, their activities or the role of their Directors / high officials /
employees at that time, or even if they were working side by side in other
concerns of the group, which is usual with the large MNCs. When it has been
denied that they are employees of Saudi Aramco, information from the internet or
news paper reports cannot be considered reliable or be placed above such
denial, and the conditions spelt out in Article 5(3)(b) would not be met.
16.6 Besides, we are of the view that the role of the Directors, wherever
stationed, is only for Aramco India, being its Directors, which is providing
services to the Applicant, rather than for providing services to the customers of
the Applicant, since Aramco India itself is set up to provide services to the
Applicant. Secondly, although they may be appointed for perpetuity, the Revenue
itself states that they will be participating from outside India, ie. the management
and control would be outside India. This stand not only appears to be
contradictory, but also does not fit into the requirement that the employees or
other personnel should be deputed to India, by the Applicant, to render the
services to the customers of the Applicant in India, for more than the specified
period.
16.6.1 However, the Applicant has submitted that none of the Directors are
employees of the Applicant. Even, when working from China they were in the
employment of other separate legal entities, and not of Saudi Aramco, the
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Applicant. Assuming for a while that they were employees of Saudi Aramco, even
if they do render any services, firstly, they would do so as Directors of Aramco
India, which is a separate and distinct legal entity. We would not be concerned
with their relationship with Saudi Aramco in the past years, nor with the number
of days and period of their stay in India in the future, when they would now be
discharging their duties as Directors of Aramco India. Even in this capacity
clauses 3 and 4 of the Proposed Addendum do not permit them to render any of
the services such that Aramco India may constitute a PE of the Applicant.
16.7 We are therefore of the view that the provisions contained in Article 5(8)
very much hold in the instant case, and Aramco India cannot be held to be a
Service PE of the Applicant, on the above limited facts, or as per the clauses of
the Agreements, and within the meaning of Article 5(3) of the India Saudi Arabia
DTAA.
17. Agency PE
17.1 The Revenue has strongly contended that the subsidiary of the Applicant,
Aramco India would form an Agency PE of the Applicant in India. It has mainly
stressed on clauses (a) and (c) of para 5 of Article 5 of the India Saudi Arabia
DTAA. Para 5 of Article 5 reads as under:
“5. Notwithstanding the provisions of paragraphs 1 and 2, where a person -
other than an agent of an independent status to whom paragraph 7 applies -
is acting in a Contracting State on behalf of an enterprise of the other
Contracting State, that enterprise shall be deemed to have a permanent
establishment in the first-mentioned Contracting State in respect of any
activities which that person undertakes for the enterprise, if such a person:
(a) has and habitually exercises in that State an authority to conclude
contracts in the name of the enterprise, unless the activities of such person
are limited to those mentioned in paragraph 4 which, if exercised through a
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fixed place of business, would not make this fixed place of business a
permanent establishment under the provisions of that paragraph, or
(b) has no such authority, but habitually maintains in the first-mentioned State
a stock of goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the enterprise;
(c) habitually obtains orders in the first-mentioned State, wholly or almost
wholly for the enterprise itself.”
17.2 This Article starts with a non obstante clause to say that irrespective of
whether a fixed place PE exists or not, if the person undertakes any of the
activities mentioned therein, and acts as an agent of the foreign enterprise, he
would be deemed to have a PE, and liable to be taxed in India. But the real test
is captured in clauses (a), (b) and (c), which determine how much and what
authority the person should exercise to be termed as an Agent of the foreign
enterprise.
17.2.1 Philip Baker in his commentary on Double Taxation Conventions
and International Tax Law, 2nd Edition (para 33, pg163), states that:
“The authority to conclude contracts must cover contracts relating to
operations which constitute the business proper of the enterprise. It would be
irrelevant, for instance, if the person had authority to engage employees for
the enterprise to assist that person’s activity for the enterprise or if the person
were authorised to conclude, in the name of the enterprise, similar contracts
relating to internal operations only. Moreover the authority has to be habitually
exercised in the other state; whether or not this is the case should be
determined on the basis of the commercial realities of the situation. A person
who is authorised to negotiate all elements and details of the contract in a way
binding on the enterprise can be said to exercise this authority in that state,
even if the contract is signed by another person in the state in which the
enterprise is situated. Since, by virtue of paragraph 4, the maintenance of a
fixed place of business solely for the purposes listed in that paragraph is
deemed not to constitute a permanent establishment, a person whose
activities are restricted to such purposes does not create a permanent
establishment either. …….. Under paragraph 5, only those persons who meet
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the specific conditions may create a permanent establishment; all other
persons are excluded.”
17.2.2 The concept of Agency PE has been explained by the Hon’ble
Supreme Court in the Morgan Stanley case (supra), as under:
“9. Lastly, as rightly held by the AAR there is no agency PE as the PE in India
had no authority to enter into or conclude the contracts. The contracts would
be entered in the United States. They would be concluded in US. The
implementation of those contracts is only to the extent of back office functions
that would be carried out in India, and therefore, MSAS would not constitute an
Agency PE as contended on behalf of the Department.”
17.2.3 In the case of E-Funds (86 taxmann.com 240), the Hon’ble Supreme
Court explained as under (para 21, Pg. 52):
“21. …However, for the sake of completeness, it is only necessary to agree
with the High Court, that it has never been the case of Revenue that e-Funds
India was authorized to or exercised any authority to conclude contracts on
behalf of the US company, nor was any factual foundation laid to attract any of
the said clauses contained in Article 5(4) of the DTAA. This aspect of the case,
therefore, need not detain us any further.”
17.3 Let us examine the services contained in the Agreements with reference to
the above provisions and cases, and whether they indicate the formation of a PE.
Firstly, on facts it will have to be established that Aramco India was authorized
and was habitually exercising the authority to conclude contracts on behalf of the
Applicant, or was habitually obtaining orders wholly or almost wholly on behalf of
the Applicant. Secondly, as mentioned by Philip Baker, such activities, even if
undertaken, should be for the business proper of the Applicant and not related to
the day-to-day operations of Aramco India itself. Thirdly, it has to be considered
whether there was any clause in the agreements governing the activities/services
rendered by Aramco India that either allows or prohibits it from undertaking the
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above activities. We have, however seen, while discussing Service PE, that the
Directors, even if employees of the Applicant, carry out the activities of Aramco
India as its Directors and not for the Applicant.
17.4 The Revenue has indeed laboured hard to point out each of the clauses of
the services to be rendered under the original Services Agreement and the
Proposed Addendum, to make out its case that Aramco India was acting as an
agent of the Applicant in India. Two things work against this position taken by the
Revenue. Firstly, that Aramco India is a separately incorporated legal and
taxable entity, and by virtue of para (8) of Article 5 of the DTAA, it does not
automatically become a PE of the Applicant, and secondly, Clause 3 of the
Proposed Addendum expressly excludes such activities from being carried out by
Aramco India that can make it an agent of the Applicant. The same reads as
under:
“3. AAI’s LIMITATIONS
In performing the obligations hereto, the Parties acknowledge and agree that
the following activities are explicitly excluded from the scope of the Services
performed by AAI under this Addendum:
(a) Representing to third persons that AAI is acting as an agent of SAO; or
(b) Negotiation with customers, or making any decision, conclusion or
judgement in relation to any substantial, commercial terms and conditions of
crude sales, business transactions or market strategy, or secure orders or
obtains orders on behalf of SAO, in any manner whatsoever whether explicitly
or otherwise. In particular, AAI shall have no authority to negotiate any
business terms or conditions for and on behalf of SAO or bind SAO in respect
of any commercial terms.”
17.5 It is further seen from the Proposed Addendum that Clause 4 further
buttresses the above limitations placed upon both the Applicant and Aramco
India, as under:
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4. ROLE & RESPONSIBILITIES OF SAO:
A. SAO would take an independent decision outside India in relation to
prospective customers and marketing strategies to be finally adopted;
B. The final terms of the contract, if any, with an Indian customer shall
be decided and agreed upon by SAO directly with the customer and AAI
shall not be a party to such arrangement; and
C. SAO shall be the sole authority to accept or reject any offers that
might arise from time to time from customers.
The above clause indicates that the Applicant has retained with itself the
authority, regarding its main business, to finalise its marketing strategies, finalise
terms of the contracts directly with the customers, and to accept or reject offers
of customers. Thus, Aramco India would be left only to provide support services
rather than act as an Agent of the Applicant.
17.6 Similarly, in the Services Agreement also we find that there is Clause 5,
which makes both the parties independent, and the same reads as under:
“5. INDEPENDENT CONTRACTOR
Each party shall perform all Services required to be performed hereunder as
an independent contractor, and not as an agent, joint venture partners, or
partners. Each party shall act in its own name. Neither of the parties has any
express or implied right under this Agreement to assume or create any
obligation on behalf of or in the name of the other, or to bind the other party to
any contract, agreement, or undertaking with any third party, and no conduct
of the parties shall be deemed to infer such right.”
17.7 The above clause is as much applicable to the Proposed Addendum in
view of Clause 7 which reads as under:
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“7. ALL OTHER PROVISIONS
A. All provisions of the “Services Agreement” shall mutatis mutandis apply to
this Addendum, which are not expressly modified.
B. Except as otherwise stated in this Addendum, the terms used therein have
the same meaning with the terms used in the Services Agreement.”
17.8 In view of the above referred clear and unambiguous provisions and
clauses in the Agreements signed between the two parties, namely Saudi
Aramco and Aramco India, and the services to be rendered as per the terms of
the agreements, the latter is completely prevented from doing any act that can
render it to be termed as an Agent of Saudi Aramco. It is only to provide support
services, as per the Proposed Addendum. Since the activities/transactions under
the said Addendum are only proposed and yet to commence, as of now we
cannot reach an adverse conclusion that the above limitations / preventive
clauses / exclusions would not be adhered to. As per the agreements therefore,
Aramco India cannot be termed as an Agency PE of the Applicant.
18. Let us also consider a couple of other arguments of the Applicant. While
the above clauses in the agreements support the case of the Applicant, the
Applicant further insists that the services mentioned in the Services Agreement,
that deal with procurement, are covered by para 4 of Article 5 of the India Saudi
Arabia DTAA, which reads as under:
“4. Notwithstanding the preceding provisions of this Article the term
"permanent establishment" shall be deemed not to include :
(a) ………………….;
(b) ………………….;
(c) ………………….;
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(d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise or of collecting information, for the
enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of
carrying on, for the enterprise, any other activity of a preparatory or auxiliary
character;
(f) the maintenance of a fixed place of business solely for any combination of
activities mentioned in sub-paragraphs (a) to (e), provided that the overall
activity of the fixed place of business resulting from this combination is of a
preparatory or auxiliary character.
In the present case, the clauses (d) and (e) may play a role, although
Aramco India does not procure goods for the Applicant but only provides support
for procurement to the Applicant. Reference to para (4) of article 5, though, looks
inappropriate as this para would come into play only if the Applicant has a fixed
place PE, in the first place. Since we have not found a fixed place PE to exist,
para 4 would not come into the picture at all. In any case, the services under the
Services Agreement relating to procurement would be exempted, and take
Aramco India out of a fixed place PE, if at all there was one. Similarly, the orders
referred to in Article 5(5)(c), as mentioned earlier, relate to obtaining orders for
sales and not for procurement, which in any case lose meaning in view of
Clauses 3 and 4 referred to above, that prevent Aramco India from entering into
any such agreement of a binding nature on behalf of the Applicant.
19. Coming to the clauses, at the repeated insistence of the Revenue, both the
Services Agreement as well as the Proposed Addendum are examined. To avoid
duplication of arguments of either side, some of the clauses are grouped
together. On a consideration of the comments of the Revenue and the response
of the Applicant to the same (refer para 10 above), our views are as under:
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20. I. Original Agreement
Clause appearing at sl. (iii)
The Revenue’s use of the word “negotiation” (instead of ‘engaging with’
used in the clause) lends itself to an assumption that it is referring to Article 5(5),
ie. authority to conclude contracts. We find it difficult to permit meanings to be
assigned to words such as to unduly expand the intent conveyed by the
provisions of the DTAA. While negotiating could possibly mean entering a
contract, the words used in the agreement are “engaging with” which only imply
having discussions or being involved in. It does not indicate an authority of a
binding nature to conclude contracts, as mentioned in Article 5(5)(a) or authority
to obtain orders, as in Article 5(5)(c), which are specifically prohibited by Clause
5 of the Services Agreement, being independent contractors, referred to earlier.
Clauses appearing at sl. (iv) and (x)
The words “ensuring” compliance by Indian suppliers and “controlling”
only imply that Aramco India is expected to do its work diligently and with
responsibility. It does not grant a legal right or authority to it to enforce the
Applicant’s terms of agreement with the supplier regarding their code of conduct.
Ensuring compliance and controlling, and inspecting quality are exercises prior or
subsequent to conclusion of a contract for procurement or supply. Clause 5 of
the Services Agreement prevents either party to act as an agent of the other in
respect of all the services to be performed. Besides, the services mentioned
under these clauses are only support services provided by Aramco India, for
which it is set up and is remunerated.
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Clauses appearing at sl. (v) to (ix), (xi) and (xii).
Follow up of orders, coordination, arranging shipments, building
relationships, monitoring quality and performance of third party inspectors are
clearly support services, and in any case are not supervisory services in
connection with any building, a construction, assembly or installation project, so
as to form a service PE, as referred to in article 5(3)(a), nor are rendered through
the Applicant’s employees or other personnel. If the Revenue meant to refer to
Article 5(4), then we are in agreement with the Applicant that the exclusions
mentioned in Article 5(4) come into play only when a PE within the meaning of
Articles 5(1) to 5(3) is in existence in the first place. We have discussed earlier
that on the facts of the case, no fixed place PE or a Service PE comes into
existence in this case.
II. Proposed Addendum
Clauses A, N, P
The Revenue’s contention that services like market research, facilitating
new opportunities and acting as a communication channel do not fall within the
exceptions mentioned in Article 5(4) is not acceptable. As mentioned above the
exclusions mentioned in Article 5(4) come into play only when a PE within the
meaning of Articles 5(1) to 5(3) is in existence in the first place. We have
discussed earlier that on the facts of the case, no fixed place PE or a Service PE
comes into existence in this case. Even otherwise, services such as market
research and identifying new customers would be preparatory in nature. Services
such as communication are also only support services. Further, as none of these
are being rendered by the employees/personnel of the Applicant to its customers
in India, engaging in these services would not create a service PE.
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Clauses B & C
In Clauses B and C, Aramco India is required to ensure competitiveness
by studying the market, gathering customer feedback and on that basis suggest
/communicate a quality and pricing structure, and other sales related information
to Saudi Aramco. We do not find anything here that indicates concluding or even
controlling of the contract. These are only a support provided to the Applicant
and for which Aramco India is created and remunerated.
Clause D
The provisions in the DTAA refer to “authority” with reference to
concluding contracts in the name of the foreign enterprise, and not to public
relations or meeting important people, as mentioned in this clause. In any case, it
cannot be assumed that in such meetings Aramco India would be concluding
contracts in the name of the Applicant when it is specifically prohibited from doing
so by Clause 5 of the Services Agreement and Clauses 3 and 4 of the Proposed
Addendum. Hence, by performing this service, Aramco India cannot be termed
as an agent of the Applicant, as this is done on its own behalf as per the role
assigned to it. Also, once we have said that there is no fixed place or service PE,
as per Articles 5(1), (2) or (3) there is no requirement to examine the exceptions
provided in Article 5(4), including preparatory or auxiliary services appearing at
Article 5(4)(e).
Clause E
Details of persons visiting India from Saudi Arabia are stated to be
unavailable by the Revenue, as the support services have not yet commenced.
In these circumstances we cannot reach a conclusion that employees and other
personnel engaged by the foreign enterprise, the Applicant, have visited or will
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be visiting India for periods more than that specified, so as to create any of the
PEs. No adverse view is possible, at this point of time.
Clauses K,L,M
These 3 clauses of the Addendum deal with the support to be provided by
Aramco India, which is the role for which it was set up as a separate legal
corporate entity. These include allocations, claims, communication of customers’
concerns, and maintaining business relationships. Article 5(5) talks of very
specific activities that need to be performed to convert an entity into an agency
PE, namely concluding contracts or habitually obtaining orders on behalf of the
foreign enterprise. These activities, as also those appearing in the foregoing
paragraphs, do not indicate, nor is there evidence on record to suggest so, that
any of the functions mentioned in Article 5(5) are being done or can be done by
Aramco India. In any case Aramco India is prevented from entering into any
contract on behalf of the Applicant as per Clause 5 of the Services Agreement
and Clauses 3 and 4 of the Proposed Addendum.
21. In the question the Applicant has stated that Aramco India would be
compensated on an Arm’s length basis for the services rendered by it to the
Applicant. It has at the same time argued that this issue is wholly irrelevant as far
as formation of a PE is concerned under the Indo Saudi Arabia DTAA, and is
relevant for attribution of profits to a PE only, if there was one. Since, we have
not considered Aramco India to be a PE of the Applicant, no discussion is
required on the issue. In the absence of any TP exercise so far, and only an old
report for an earlier period available, and also because we do not deal with
issues that involve valuation, as these lie in the jurisdiction of the assessing
authority, no discussion or opinion is called for. For the present we have confined
ourselves to the issue of creation of a PE, as required in the question. As of now,
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Saudi Arabian Oil Company
the Applicant has given an undertaking in the question itself that Aramco India
would be compensated on an Arm’s Length basis as per the Indian Transfer
Pricing laws and regulations.
22. In the above analysis we are caught in between two situations. On the one
hand are the specific provisions of the DTAA, the clauses in the Agreements,
such as Clause 5 of the Services Agreement and Clauses 3 and 4 of the
Proposed Addendum, which prohibit Aramco India from doing activities that are
clearly in the domain of the Applicant, such as concluding contracts or obtaining
orders, and exclude all such acts that may render Aramco India a PE of the
Applicant. On the other hand we have the wordings used in the different services
enumerated in the two agreements, which lend themselves to varied
interpretation, in the absence of material facts. However, the above discussion
shows that in view of the clear exclusions and prohibitions incorporated in the
two agreements, as they presently stand, Aramco India would not be rendering
services or doing such acts as can deem it to be a PE of the Applicant, under
Article 5 of the India Saudi Arabia DTAA.
23. As we are dealing with a question based on a Proposed Addendum, as per
which the proposed transactions are envisioned, we have dealt with more on the
clauses of the agreements, which are found to be specific and detailed, and
reflective of the proposed activities. We are mindful of this concern of the
Revenue. During the course of these proceedings the Ld. Sr. Counsel for the
Applicant also appreciated this concern. In this connection, he submitted that it is
a well settled law that an Advance Ruling pronounced by this Authority is based
on the statement of facts given in the application in relation to the transaction the
Applicant has entered into or proposes to enter into. Attention was drawn to
Section 245S(2) of the Act, which reads as follows:
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Saudi Arabian Oil Company
“The advance ruling referred to in sub-section (1) shall be binding as
aforesaid unless there is a change in law or facts on the basis of which the
advance ruling has been pronounced.”
We, therefore, make it clear that this Advance Ruling, which is based on
the clauses contained in the services listed out in the Proposed Addendum
entered into between Saudi Aramco and Aramco India, will have no binding
effect on the Revenue authorities should they subsequently find that the
Agreement and facts pertaining to proposed transactions, as mentioned in Ann III
of the application, actually differ, or their activities are carried on differently from
what has been stipulated therein. In our considered view, this care must be taken
in cases of proposed transactions. This should address the apprehensions
expressed by the Ld. CIT (DR) during the course of these proceedings.
24. In view of the foregoing, the question posed to us for a Ruling, is answered
as under:
Based on the nature of business support / marketing support activities
proposed to be undertaken by the Indian affiliate entity viz. Aramco Asia India
Private Limited (Aramco India), as listed in the Statement of relevant facts
(Annexure III) Aramco India would not create a Permanent Establishment (PE)
for the Applicant in India under Article 5 of Double Taxation Avoidance
Agreement between India and Kingdom of Saudi Arabia, where such activities of
Aramco India are duly compensated on an Arm’s Length basis in accordance
with the Indian transfer pricing laws and regulations.
This Ruling is given and pronounced today on this 31st day of May, 2018.
Sd/- Sd/- (Ashutosh Chandra) (R S Shukla) Member (Revenue) In-Charge Chairman