Introduction
In the case of Skaps Industries India (P) Ltd. v. Income-tax Officer (International Taxation)[i], the central issue pertained to the interpretation of a. 5(2)(k) of the India-USA Double Taxation Avoidance Agreement (‘DTAA’). This provision determines whether a foreign entity has a Permanent Establishment (‘PE’) in India based on the duration of its operations. The key question before the Income-tax Appellate Tribunal (‘ITAT’) was whether Teems Electric Co. Inc. (‘TEC’), a USA-based entity, had a PE in India due to the presence of its employees for installation services. The Tribunal also examined the withholding tax obligations of Skaps Industries India (P). Ltd. (‘Assessee’), under s. 195 of the Income-tax Act, 1961 (‘IT Act’).
Facts
The Assessee entered into three job work orders with TEC for the installation and commissioning of machinery at its plant located in Mundra, Gujarat. The payments made to TEC, totalling USD 730,478 between January 2013 and July 2013, were linked to the following purchase orders:
PO No. 155/1213: Electrical labor services for the installation of Non-Woven Line 8.
PO No. 156/1213: Mechanical labor services for the same installation.
PO No. 157/1213: System start-up and commissioning services for the Heat Set Cabinet and Exit Section drives and controls.
The issue arose when the TDS Officer, during assessment proceedings, concluded that TEC had a PE in India under a. 5(2)(k) of the DTAA, as the services provided by TEC exceeded the prescribed threshold of 120 days. Consequently, the TDS Officer held that the payments to TEC constituted business income taxable in India, and as the assessee failed to deduct tax under s.195, it was treated as an assessee in default under s.201(1A) for non-withholding of taxes and was subjected to interest on the alleged shortfall.
The assessee appealed before the Commissioner of Income-tax (Appeals) ['CIT(A)'], who upheld the TDS Officer’s order, finding that the total number of man-days worked by TEC employees amounted to 161 days, thereby exceeding the 120-day threshold for an Installation PE under a. 5(2)(k) of the DTAA.
The assessee, however, argued that the CIT(A)’s calculation of 161 days was based on multiple counts of employees visiting simultaneously, which is not permissible under the Linklaters v. DDIT[ii], which clarified that for determining a Construction/Installation PE, the stay of employees must be computed cumulatively (not independently), meaning simultaneous stays by multiple employees on the same day cannot be added separately. The actual stay, according to the assessee, was 52 days during the assessment year ('AY') 2013-14 and 65 days during AY 2014-15, well below the 120-day threshold mandated by a. 5(2)(k) of the DTAA.
Legal Issues
Does TEC have a Construction/Installation PE in India under a. 5(2)(k) of the DTAA?
Should multiple employees’ simultaneous stays be counted cumulatively or independently to determine the PE threshold?
Was the Assessee obligated to withhold tax under s.195 of the IT Act?
Observations
The Ahmedabad ITAT ruled in favour of the assessee, holding that TEC did not have a PE in India under a. 5(2)(k) of the DTAA. Consequently, the assessee was under no obligation to withhold tax under s.195 of the IT Act. The Tribunal provided a detailed rationale for its decision:
Cumulative Counting of Employee Stay Periods
The ITAT emphasized that, under a. 5(2)(k) of the DTAA, the computation of employee stays must be done cumulatively, not independently, meaning multiple employees staying on the same day cannot be counted separately. Relying on the precedent established in Linklaters (Supra), the ITAT rejected the CIT(A)’s approach, which incorrectly aggregated simultaneous employee stays, inflating the total count to 161 man-days. Instead, the Tribunal found that, when calculated cumulatively, the actual period of stay was 52 days during AY 2013-14 and 65 days during AY 2014-15, totalling 117 days, which was below the 120-day threshold for the constitution of an Installation PE under the DTAA.
Same-Site, Single-Project Rule
The ITAT observed that the services provided by TEC were confined to a single project (installation of Non-Woven Line 8) at a single location (Mundra plant). Therefore, no aggregation of multiple projects was applicable. The CIT(A)’s presumption that work began immediately on receipt of equipment (November/December 2012) was dismissed, as TEC’s actual stay was from 05.03.2013 to 07.06.2013, as supported by the travel records and certificate issued by TEC.
Inapplicability of Payment Dates for PE Determination
The Tribunal clarified that payment dates to TEC were irrelevant for determining the period of installation and the existence of a PE. The ITAT held that the period of employee stay in India is the sole determining factor for a Construction/Installation PE under a. 5(2)(k) of the DTAA, not the dates of contractual payments.
Rejection of CIT(A)’s Presumption and Non-Filing under s.195(2)
The Tribunal rejected CIT(A)’s inference that the assessee’s failure to seek a determination under s.195(2)implied that TEC had a PE. The ITAT observed that the burden of proving the existence of a PE lies with the Revenue, and the assessee’s failure to file under s.195(2) does not constitute presumptive evidence of taxability.
Application of Linklaters Precedent and OECD Guidelines
The Tribunal relied on the Mumbai ITAT’s ruling in Linklaters (Supra) and OECD Commentary on a. 5, which state that temporary interruptions, such as employee rotations or simultaneous visits, do not contribute to extending the period of a Construction/Installation PE unless they extend the project’s total duration beyond the threshold period.
Conclusion
This ruling underscores the necessity of a precise determination of PE duration in line with tax treaties and elucidates the appropriate method for evaluating withholding tax responsibilities in international transactions. The Tribunal favoured the Assessee, determining that TEC did not constitute a PE in India as per a. 5(2)(k) of the DTAA. As a result, the Assessee was not required to withhold tax on payments made to TEC, rendering the tax department's demand under s.195 untenable. The Tribunal reiterated that the concurrent presence of multiple employees should not be aggregated when assessing PE status and emphasised that the actual duration of work performed should be the basis for evaluation. This decision highlights the importance of precise PE threshold interpretation within tax treaties and provides clarity on calculating employee stay durations in cross-border taxation matters.
End Note
[i] [2025] 170 taxmann.com 244 (Ahmedabad - Trib.)
[ii] (2017) 106 taxmann.com 195 (Mumbai ITAT).
Authored by Vanshika, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.