Sub-Contracting of Assessee’s Annual Maintenance Service to an Indian Contractor doesn’t create a Virtual Presence of the Assessee in India: ITAT [Read Order]

Kolkata Bench of Income Tax Appellate Tribunal (ITAT) in HITT Holland Institute of Traffic Technology B.V vs. DCIT, International Taxation, held that presence of an Indian contractor to which the assessee has sub-contracting the whole AMC work on the principal-to-principal basis does not create any virtual presence of the assessee in India.

ONCGC awarded a contract to the assessee, HITT Holland Institute of Traffic Technology B.V, for supply, installation, testing and commissioning of Vessel and Air Traffic Management System (VATMS) along with the provision of maintenance services. The Contract provided a one year warranty period after handing over of the project site and provision of Annual Maintenance Services (AMC services) for 6 years post such warranty period.

Accordingly, the assessee provided only AMC services for the VATMS system installed by it in the earlier years. The activity was sub-contracted to a local independent contractor viz Elcome Marine Services Private Limited (in short Elcome) and included regular maintenance activities such as visiting the sites for cleaning, checks, local fault repair etc.

The Assessing Officer (A.O.) taxed the AMC Fee received by the assessee as business profits attributable to an installation of PE in terms of the Article 5(3) of the India-Netherlands DTAA. According to the revenue, the ONGC project was in existence for a period of more than six months and therefore constituted an ‘Installation PE’ of the assessee in India. The revenue further relied on the fact that a subcontractor had carried out AMC work in India on behalf of the assessee and therefore the assessee had a virtual presence in India for execution of the project.

Aggrieved, the assessee filed an appeal before the ITAT. The Counsel for the Assessee argued that AMC services provided post completion of installation activities at the site of the customer, cannot lead to carrying out installation activities for the purpose of constitution of an Installation PE in India. He argued that the assessee had subcontracted the whole AMC work on the principal-to-principal basis and this does not create any virtual presence of the assessee in India. The Departmental Representative for the Revenue contended that the assessee by employing a subcontractor to execute the AMC service contract had made its presence indirectly in India. He argued that AMC is not a separate contract and it had only flowed from the earlier contract of doing installation and commissioning.

The ITAT Bench Comprising of Judicial Member A.T Varkey and Accountant Member M. Balaganesh observed “we hold that AMC services provided post completion of installation activities at the site of the customer, cannot lead to carrying out installation activities for the purpose of constitution of an ‘Installation PE’ in India. Further, it is held that presence of an Indian contractor to which the assessee has sub-contracted the whole AMC work on the principal-to-principal basis, does not create any virtual presence of the assessee in India.”