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PERMANENT ESTABLISHMENT
ARTICLE 5
(1) For the purposes of this Convention, the term ‘permanent
establishment’ means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.
(2) the term "permanent establishment" includes especially:
(a) A place of management;
(b) A branch;
(c) An office;
(d) A factory;
(e) A workshop;
(f) A mine, an oil or gas well, a quarry or any other place of extraction of natural
resources.
(3) The term "permanent establishment" like encompasses:
(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 six months;
(b) The furnishing of services, including consultancy service, 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 or a connected project) within the
country for a period or periods aggregating more than six months within any 12-month
period.
(4) Notwithstanding the preceding provisions of this Article the term "permanent
establishment" shall be deemed not to include:
(a) the use of facilities solely for the purpose of storage or display of goods or
merchandise belonging to the enterprise;
(b) The maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage or display;
(c) the maintenance of a fixed palce of business solely for the purpose of purchasing
goods or merchandise, any other enterprise;
(d0 The maintenance of a fixed palce of business solely for the purpose of purchasing
goods or merchandise or of collecting information, for the enterprise;
(e) The maintenance of a fixed palce of business solely for the purpose of carrying on,
for the enterprise, any other activity of a preparatory or auxiliary character.
(5) Notwithstanding the provision of paragraphs (1) and (2), where a person - other than
an agent of an independent status to whom paragraph 97) 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 a 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 fixed palce 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.
(6) Notwithstanding the preceding provisions of this Article, an insurance enterprise of a
Contracting State shall, except in regard to reinsurance, be deemed to have a permanent
establishment in the other Contracting State if it collects premiums in the territory of
that other State or insurers risks situated therein through a person other than an agent
of a independent status to whom paragraph (7) applies.
(7) An enterprise of a Contracting State shall not be deemed to have a permanent
establishment in the other Contracting State merely because it carries on business in that
other State through a broker, general commission agent or any other agent of independent
status, provided that such person are acting in the ordinary course of their business.
However, when the activities of such an agent are devoted wholly or almost wholly on
behalf of that enterprise, he will nto be considered an agent of an independent status
within the meaning of this paragraph.
(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.
32. Scope
The concept of permanent establishment connotes extension of business activity in
another jurisdiction, as if doing business in that jurisdiction. Its purpose is to
determine the right of a Contracting State to tax the profits of an enterprise of the
other Contracting State. Doing business may become manifest by opening of offices (whether
these be called liaison offices or branches) participating in the management, supervision
or control of such business, or any such other acts which would suggest continuity of
commercial dealings, or undertaking functions normally incidental to and in progressive
prosecution of the object and purpose of the business organisation or of commercial gain.
The definition of the expression 'permanent establishment' normally found in all tax
agreements, contains various modes or acts which are the manifestation of a non-resident
intention of doing business in the host country though the enumeration of such modes or
acts is not exhaustive, but illustrative. For example, if a foreign organisation, even
when it has no office in the host country, may be considered as doing business if it
transacts a portion of its ordinary business there. The real test is found in an answer to
the question, whether the foreign company is engaged in the host country in the
transaction of the business, or any part thereof, for which it was created and organised
to transact. If the answer is in affirmative the company may be regarded as doing business
there. The fact that a foreign company acquires stock in the host country, or maintains a
fixed place of business for the purpose of purchasing goods or merchandise or collecting
information, or uses any facilities for the storage, display or delivery of goods, etc.,
would not constitute act of doing business.
'Permanent establishment' postulates, therefore, the existence of a substantial element of
an enduring and permanent nature of a foreign enterprise in another country which can be
attributed to a fixed place of business in that country and it could be of such a nature
that it would amount to virtual projection of a foreign enterprise of a country into the
soil of another country. In the agreements the
expression 'permanent establishment' has been defined extensively so as to limit the
circumstances in which a foreign enterprise could be taxed on its business income. The
definition in most of the Pakistani agreements is wider than what has been provided in the
OECD Model Convention.
The general effect of double taxation agreements is to remove any liability for Pakistani
income-tax on the business profit unless the non-resident carries on business in Pakistan
through 'permanent establishment'. A business carried on in a country by a foreign
enterprise is taxable in the host country if it is carried on through a 'permanent
establishment' is well accepted international practice. It is a concept which is an
improvement in Pakistani 'business connection' principle as contained in section 12(2)(a)
of the Income Tax Ordinance, 1979. Almost all double taxation agreements spell out this
principle. Since 'permanent establishment' is a decisive factor in establishing the
location of the source of income from a business, this expression is defined in the double
taxation agreement, with care and caution and in detail. All agreements contain a
definition of this expression which again are broadly similar to each other, differing in
minor details. All, however, agree this expression to mean a fixed place of business
through which business of an enterprise is wholly or partly carried on. Specific
definition, however, is assigned in individual double taxation agreement by emphasising
what does and what does not, what is deemed to be and what is not deemed to be, what means
and what does not mean, permanent establishment.
33. Permanent establishment is a fixed place of business
Paragraph (1) of Article 5 is very concise as to what the expression 'permanent
establishment' connotes, as meaning a fixed place of business in which the business of an
enterprise is carried on wholly or partly: Fixity of the place of business, rather than
the arising or accrual of profit or any other criterion based on profitability or
productivity, determines the 'permanent establishment'. A place, which is somewhat
permanent or fixed, i.e., a distinct situs used by the enterprise for carrying on of its
business wholly or partly is the essential characteristic of the term 'permanent
establishment'. It, therefore, means a place of business, which is fixed, through which
the business of an enterprise is wholly or partly carried on. The emphasis is on the
fixity of the place of business with specific situs.
33.1. Place of business covers premises, facilities and
installation - The term 'place of business' covers any premises, facilities or
installations used for carrying on the business of the enterprise whether or not they are
used exclusively for the purpose. The term 'premises' becomes applicable to houses, lands,
shops or whatever it may be so. The word has come to mean generally real property of one
sort or the other. In the context of Article 5, it may mean where goods are sold either by
retail or wholesale or where services are rendered to customers including an office, a
store-room, godown, warehouse, or work place, a factor or a commercial establishment,
where any business, trade or profession is carried on for profit. In any case where a
person carries on business through an agent (by whatever name called) the place of
business of such agent is the place of business of the enterprise. Availability of
premises, facilities or installations is the only requirement and for that matter it is
not necessary that the enterprise must be their owner. Their availability could be secured
otherwise also. They may belong to the agent of the enterprise, or to somebody else who
places their use at its (enterprise) disposal on hire 'or on some other consideration.
33.2. Concept of fixity contemplates permanency- The place of
business has to be a fixed one, with a specific situs. The geographical point or the
distinctiveness of the place of its location is essential to provide fixity to the place
of business. The fixity refers to the situs of the operation of the place of business and
not to the fixation of the equipment to the soil. The concept of fixity contemplates a
degree or permanency to the place of business not in the sense that it perpetuates, but in
the sense that it endures. The words 'permanent, 'business', 'carried on' convey an. idea
of some permanency or regularity something more than casual or occasional. The mere
leasing of equipment without maintaining a fixed place of business for such leasing does
not constitute permanent establishment. The shortness of period is not relevant as the
purpose for which it exists. The duration of the period may be short because of the nature
of the activity or of some account yet the place of business may be permanent for such
period. If the setting up of the place of business is done purely for temporary purpose,
it may not be taken to be permanent establishment unless it is maintained for such a
period that it cannot be considered a temporary one.
33.3 Temporary suspension of business does not mean loss of
permanence - Temporary suspension of Th. activity does not rob the place of business
of its permanence. It is not necessary that the activity should be permanent in the sense
that there is no interregnum in its operation, if the operations are carried on with
regularity and periodicity. If during the interregnum the enterprise has let out its
assets, the income arising therefore is taxable as business profit of the permanent
establishment. It is well settled law that if an asset has been acquired and has also been
used for the purpose of business it ceases nto to be a commercial asset of the business as
soon as it is temporarily put out of use. The income arising as a result of letting it out
is taken to be business income. A temporary ‘lull’ in the activity of the
enterprise does nto mean its closure. If the place of business is leased out to some other
enterprise, and there is no intention of the lessor to return to business, the permanent
establishment ceases. A permanent establishment does nto exist if the enterprise merely
sets up the machines and then leases them to other enterprises. If may, however, exist if
the enterprise operates and maintains the machines on its account; if a commercial asset
of an enterprise is leased to a place of business, the activity will render that place a
permanent establishment. If leasing is done without maintenance of a place of business for
such leasing, the leased property would not constitute a permanent establishment of the
lessor. If the place of business is leased out temporarily to another enterprise, the
income arising as a result thereof would not ceases to be business profit of the permanent
establishment. In Pakistan and India various High Courts and Supreme Court of both the
countries have held that there an assessee has not intended to go out of the business but
during the period of interruption leases out the business or its assets the income is
assessable as business income. In CEPT v. Chri Lakshmi Silk Mills Ltd., it was held that the leasing of a dyeing plant for a short period was
business income . In Sri Ram Mahadro Prasad v. CIT, the
Court held that the newly set up oil mills which were temporarily let out were
commercial assets. In CIT v. Vikram Cotton Mills Ltd., it
was held that the company had no intention to discontinue its business, and that the
income derived form lease of plant and machinery was business income. In Addt. CIT v.
Rajindra Flour & Allied Industries (P) Ltd., it was
held that the leasing of the mill was essentially a temporary measure to tide over a
period of difficulties and the letting must be taken as one possible way available to the
assessee for exploiting its commercial assets and had to be treated as part and parcel of
its carrying on the business. In CIT v. Northern India Theatres (P.) Ltd.,
it was held that lease of cinema house coupled with interest-free
loan was an arrangement made by the assessee of both financing the setting up of the
cinema and the exploitation of the same in a commercial manner.
Thus, if the intention of an assessee is to go out of business altogether,
(which intention could be gathered from its conduct, whether it maintains office or
establishment for carrying on the business, and from other surrounding circumstances) and
to enjoy the income arising from the lease of the property in its capacity as its owner,
the income is not assessable as business income but as
the one arising from the property. Temporary suspension of the business activity does not
change the character of income derived from the leasing of the commercial asset during the
period of suspension to anything different from business, as such, a suspension does not
mean closure of business.
33.4 Business should be carried on wholly or partly though the
fixed place - Besides existence of the place of business, and its fixity, the other
essential ingredient of the permanent establishment is that the business is carried on
through such place of business wholly or partly. There should be nexus between the place
of business and the activity of the carrying on of business. The word ‘wholly’
has been used with reference to the quantum of activity. All the activities necessary for
carrying on a particular business should be undertaken through the place of business or
originate therefrom or have relation or connection thereto . The nexus between all the
components of a business activity and the place of business should be complete. The word
‘wholly’ has no reference to the extent or nature of the business, but to the
extent of the carrying on of the activity relating thereto. The activity must be with
reference to an only for the purpose of carrying on of the business of the enterprises.
The natural and plain meaning of the word ‘wholly’ is entirely, completely,
fully, totally and in every respect.
The expression ‘wholly or partly’ suggests that the activity relating to
carrying on of business may have many components and all these taken together constitute
one whole. The carry on business, there must exist the characteristics of volume,
frequency, continuity and system, indicating an intention to continue the activity of
carrying on the transaction. To regard one activity
to be business, there must be course of dealings, there must be some real and systematic
or organized course of activity or conduct. The continuous repetition of transactions
constitute business. Business involves a constant flow of transactions upon transactions
everyday, subject to risks, vicissitude requiring overt acts of management by those who
wish to profit buy it. Thus, when all transactions, their frequency, volume are managed or
controlled or carried out through the fixed place of business, the business could be said
to have been carried out on wholly through it. Even if the entire activities relating to
the carriage of business are not undertaken therefrom but only a part of them is so
undertaken, the necessary requisite condition for the establishment of permanent
establishment is satisfied.
34.Definition is inclusive
The definition of the expression ‘permanent establishment’ in inclusive. It
deems some places as to include, while some others as not to include, within the scope of
such definition. The double taxation agreement not only defined permanent establishment
rather strictly but also sets out many types of ‘business presence’ which fall
short of a permanent establishment. This a done by defining the expression with inclusive
definition. It is well settled that the word ‘includes’ is often used to enlarge
the meaning of the words as comprehending not only such things as they signify according
to their natural import but also things which the definition declares to include. The
intention is to give a wide meaning to the word. Such word then denotes extention and
cannot be treated as restrictive in any sense. The restriction is, however, provided when
the definition goes on illustrating cases which are not to be taken ‘permanent
establishment’ or by laying down negatively what shall not constitute permanent
establishment such as use of facilities solely for storage, display or delivery of goods,
or maintenance of stock or goods for purposes of processing by another enterprise, or a
fixed place of business for the purpose of advertising for supply of information, for
scientific research or for activities which have a preparatory or auxiliary character.
Thus, the emphasis on the palce of business appears to be on the measure of control over
the physical facilities of establishment, however, insignificant it might be, as exercised
by that establishment. the definition as given in the OECD Model Convention has been
extended by the UN Model so as to include a building or construction, or assembly project,
whose duration extends six months (or irrespective of length of time if the project
charges exceed 10 per cent of the sale price of machinery or equipment), and management
consultancy services, if the representatives of the enterprise rendering such services
stay for more than six months in the country of source.
A permanent establishment connotes a projection of the foreign enterprise itself into the
territory of the taxing State in a substantial and enduring form, as aforesaid. It is the
common practice of an enterprise which carries on trade or business in one country to
expand its operation, without incorporation or further incorporation into another country,
for it then has a branch there, or a permanent establishment which can be registered as
having sufficient presence in that country to make them taxable there in the same manner
as the residents of that country.
‘Permanent establishment’ postulates, therefore, the existence of a substantial
element of an enduring and permanent nature of a foreign enterprise in another country
which can be attributed to a fixed place of business in that country and it could be of
such a nature that it would amount to a virtual projection of the foreign enterprise of a
country into the soil of another country. Place of
business unusally means management office, a branch, a representative office, a
factory, a place where available resources are exploited, or contracted projects of
building, installation, assembly or exploration are conducted. Definition of the
expression ‘permanent establishment’ in all the treaties contains illustration
of what; may be taken to man a permanent place of business such as, a place of management,
a branch, an office, a factory, a workshop, a warehouse, a mine, oil well, quarry or other
palce of extraction of natural resources, a building site or construction, installation or
assembly project which exists more than a specified period (say three, six or twelve
months). Focus of attention in these illustration is the place or building which has an
effective role to play in the doing of business whether as place where manufacturing is
done, or for storing the manufactured Articles, or for the administration or management of
the business partly or wholly.
34.1 Place of management - The place of management exists is
the place where control and management of an enterprise reside. ‘Control and
management’ have been figuratively described as the ‘head and brain’. In
the case of individual, this test is not necessary because his residence in a country for
a certain period is enough, as he would necessarily bring his ‘head and brain’
with him. The ‘head and brain’ of the company is the board of directors and if
the board of directors exercises complete local control then the company is also deemed to
be resident. In the case of a firm, an association of persons and a Hindu undivided
family, the control and management can be exercised by one or more of the group. The
expression ‘control and management’ means de facto control and management and
nto merely the right or power to control and manage.
For detailed discussion, see paras 31, 31.1, 31.1-1, 31.1-2, 31.2, 31.3, 31.3-1, 31.3-2,
31.3-3 and 31.4.
34.2 Branch - A corporation may be engaged in a trade or
business in a foreign country through a ‘branch office’. Such an
‘office’ is referred to ‘permanent establishment.’ The branch office
is not regarded as a separate legal entity. Its profits are the profits of a corporation
owning the branch office. It is different from a subsidiary which has a legal identity of
its own, and which is regarded as a domestic
corporation in the country where it is established. The subsidiary may be a branch office
of a foreign establishment under certain circumstances. If it is engaged in transaction
with or on behalf of the foreign enterprise as an agent of the parent company in
circumstances pointing out to a trading in host country, it can be said to be performing
functions on behalf of that enterprise in the same way as any other could so do and be
considered a permanent establishment. To that
extent the subsidiary is the branch office of the foreign enterprise. A mere use by a
parent of its subsidiary company’s space and employees would not constitute permanent
establishment, because a permanent establishment
requires persons with authority to carry on some part of taxpayer’s money making
activities. The very fact that a company which is a resident of a State is controlled by a
company which is resident of a foreign State does not of itself constitute a permanent
establishment of the foreign company. A clause to that effect is usually found in all tax
agreements, as a part of the clause dealing with the concept of ‘permanent
establishment’.
Thus, the tax agreements do not affect the tax treatment of subsidiary company, unless it
could be performing such functions on behalf of the parent company as to clothe it with
‘permanent establishment’ of the parent. As for the, branch office, it is to be
taken as a projection of the parent enterprise.
34.3 ‘Office’ - The word ‘office’ has
various meanings depending upon its context. It may
mean a place or a premises for administration or clerical work or for transacting
business. It may also mean a situation, post or appointment. An office means a position
which requires a person holding it to perform certain duties and discharge certain
obligation; a position to which certain duties
are attached. Thus the word ‘office’ is
commonly understood as suggesting a position of trust or authority or situation
emphasizing the idea of employment in a subordinate position. If a foreign enterprise maintains a place or a premises for
transacting business or entrusts to a person to do certain duties and discharge certain
obligation, it can be said to have a permanent establishment.
34.3-1 Representative office, whether permanent establishment -
Representative office may mean place of business but it is nto taken to be permanent
establishment, if its activities are confined to matters of preparatory, auxiliary nature,
or are of the nature of support functions, via, collection of information and transmitting
to the head office distribution or dissemination of information concerning the product of
foreign enterprise, or receiving enquires on behalf of the foreign enterprise. If the
representative office does not receive any income or does not sign an contract, or is not
looked upon in the host country as a projection of the foreign enterprise, that is, if its
activities are confined to supporting its head office and do not extend to areas which
contribute to the generation of income or are necessary steps with commercial contents for
the carrying on business it (the representative office) cannot be taken as permanent
establishment. Doing research, providing information, or keeping liaison are not the
activities which have necessarily to be taken for the carrying on business as they lack
the characteristics of commerce of trade. But if any of such activities extends to the
domain of rendering consulting and other services or liaison to parties other than the
head offices which engage them, the representative office would be taxed on the income
attributable to such activity.
The Swiss Bundesgericht (judgment of the Swiss Bundesgericht dated 17-9-1977 on
Swiss-Spanish Treaty) had to interpret the Swiss-Spain treaty and to decided whether the
‘representative office’ of a Spanish bank constituted a ‘permanent
establishment’ in Switzerland. Similarly, the US Revenue Ruling (No. 72-1-418 on
US-German Treaty) has decided while dealing with US-German tax treaty that a German bank
representative office in US did not constitute a ‘permanent establishment’ of
the German bank in the US.
34.3-2 Administrative office, whether a permanent establishment -
Similarly administrative offices, especially in the banking and the financial field, or
regional headquarters, are not permanent establishments provided no clear evidence of
‘trading’ emerges. All such office - be they are representative offices or
regional headquarters, administrative office - derive their validation from the narrow
definition of ‘permanent establishments’ in some double tax agreements and also
from the explicit exceptions set out in such definitions as such offices and headquarters
fall short of the activities of a trading office.
34.3-3 Personal office, whether an office - Ordinarily an
office would mean the place where official business is transacted. But a ‘personal
office’ would not be an office simpliciter or a commercial office, as an outsider
would not normally be admitted. Commercial transactions do not take palce in such a
office. There is no fixity of the location. If a person uses an portion of his residential
premises as his personal office and the like such a place if referred to as personal
office is essentially residential.
34.3-4 Shop, whether an office - A shop means any premises
where goods are sold either by retail or wholesale or where services are rendered to
customers, and includes an office, a store room, godown, warehouse or work palce whether
in the same premises or otherwise (mainly used) in connection with such trade or business,
but doe not include a factory, a commercial establishment, residential hotel, restaurant,
waiting house, theater, or other places of public amusement or entertainment. So a
‘shop’ may also be primarily a place where goods are bought and sold. it denotes
a building, primarily used for the retail sale of goods. A ‘shop’ must,
therefore, be one where trade or selling is conducted or carried out in a defined
premises, i.e., the same must be a place or room or building where goods are sold. It is not actually necessary that the delivery of
the goods to the purchaser should take place at the premises in which the business of
buying or selling is carried on to constitute the said premises into a ‘shop’.
The delivery of the goods sold to the purchaser is only one aspect of trading activities.
Negotiations of the terms of sale, carrying on of the survey of the goods imported,
arranging for the delivery of the goods sold, collection of the price of the goods sold,
etc., are all trading activities. The premises where business is carried on by a company
is undoubtedly a shop if the activities that are carried on their relate only to the sale
of goods which are imported into Pakistan.
34.4 ‘A factory’ - A factory is a building or a
collection of buildings, usually with its equipment or plant, appropriated to the
manufacture of goods; the place where workmen are employed in fabricating goods, wares or
utensils. It means a premises in which
manufacturing process is carried on, as also the precincts thereof. various statutes in Pakistan have defined this expression, and all
generally hold that it means any premises, including the precincts thereof, in any part of
which a manufacturing process is being carried on or is ordinarily so carried on, whether
with or without the aid of power. A factory is,
therefore, a building in which goods are manufactured. It may also mean a place where a
number of traders reside in a foreign country for the convenience of
trade.
34.5 Workshop - Workshop is any premises wherein an industrial
process is carried on. It is an establishment where manufacture of goods or other
materials is carried on. It is understood in the trade as having a very wide connotation.
34.6 Warehouse - ‘Warehouse’, according to the Oxford
Dictionary, is described as "a building or part of a building used for the storage of
merchandise; the building in which a wholesale dealer keeps his stock of goods for sale; a
building in which furniture or other property is housed, a charge being made for the
accommodation: a Government building (more fully bonded warehouse) in which dutiable
imported goods are kept in bond until it is convenient to the importer to pay the
duty". According to Webster’s New Twentieth Century Dictionary,
‘godown’ means a warehouse and ‘warehouse’ means ‘a building
where ware or goods are stored, before being distributed to retailers: a storehouse’.
Stroud’s Judicial Dictionary (volume 5, fourth edition), contains the following
observation: "A ‘warehouse’, in common parlance, certainly means a place
where a man stores or keeps his goods which are not immediately wanted for sale." In
1751, on Clerks of Assize Act, 1698 (10 Will, 3, c. 12), it was held that
‘warehouses’, meant ‘not mere repositories for goods but such places where
merchants and other traders keep their goods for sale in the nature of shops, and whither
customers go to view them.
It must immediately be mentioned that this is not a common parlance meaning but a meaning
given to a warehouse referred to in Clerks of Assize Act, 1698. In Black’s Law
Dictionary (Fifth Edition), ‘warehouse’ has been described as a ‘structure
used for the reception and storage of goods and merchandise’. It further states that
‘the term may include any structure used to hold goods, stores or wares temporarily,
or for a length of time’. Aiyar’s Judicial Dictionary (Ninth Edition), defines
‘godown’ as a storage, or warehouse. According to that dictionary, a
‘warehouse’ is a place licensed for the storage of goods. Halsbury’s Laws
of England (Fourth Edition), Note 3 to paragraph 428 on page 204 reads as under:
" ‘Warehouse’ means a place used for the storage of goods, even
temporarily, as in a dock transit shed: A storage place which is ancillary to a business
which is wholly or substantially retail is nto a warehouse: A room in the basement under
retail sale-rooms used for storing goods temporarily until wanted in the sale-rooms was
held not to be a warehouse. In Burr v. William Whiteley Ltd. [1902] 19 Tax LR 117. These
cases are not to be taken as laying down an absolute rule of law that no building can be a
warehouse if it is connected with a retail business alone; it is possible even in a retail
business to have a building which may be in the fullest sense of the term a
warehouse."
It will appear from the above dictionary meanings of ‘godowns’ and
‘warehouses’ that both these terms are synonymous and interchangeable. The
common parlance meaning which can be attributed to godowns or warehouses is that they must
be used for the purpose of storage of goods even for a temporary period. Shops in which
wholesale or retail business in cloth is carried on cannot, therefore, come with the
meaning of ‘godowns’ or ‘warehouses’.
35. Building site or construction or assembly project, a permanent
establishment
Building site, construction or similar activities constitute a form of doing business. The
OECD Model Convention imposes a time limit of 12 months for an assembly project to
constitute a permanent establishment. These activities, as a consequence of great
advancement in modern technology result in generation of income if undertaken for a very
short period, much shorter than the period of 12 months as laid down in the OECD Model
Convention. The developing countries have, therefore, been wanting the curtailment to a
shorter period and some, even no prescription of any time limit in the same manner as
'relating to the activities of artists, athletes and public entertainers under Article 17
of the OECD Model Convention which activities are taxed at the place where these are
performed irrespective of their duration. Originally, the limitation of period on the
presence of an activity was thought necessary because some time is needed to prepare some
foundational work or to initiate preparatory or auxiliary operations before an enterprise
could establish itself for generating income. Such work are exploratory in nature and may
not be a source of income. It was thought that the concept of 12 months may introduce
certainty into the tax field so that investors could avoid disputes, administrative
difficulties and expenses in determining tax liabilities by them.
As a compromise between the two extreme views, the UN Model lays the limit of 6 months.
The UN Model, while limiting the duration of period to six months, expands the term
'building 'site or construction or assembly project' 'to include 'installation project' or
'supervisory activities'. The UN Group also added that a permanent establishment also
includes furnishing of services by an enterprise through its employees or other personnel
where these activities continue, for the same or a connected project, within the country,
for a period aggregating more than six months within any twelve-month period.
The concept of permanent establishment restricts, as aforesaid, the rights of the States
in which the business. is carried on by a foreign enterprise, by specifying that such an
enterprise resident in one of the treaty countries shall only be taxed through a permanent
establishment there. The definition in most of the Pakistani agreements is wider than what
has been provided to this expression in the OECD Model Convention. A building site,
construction, installation or assembly project and the like is deemed to be permanent
establishment. In the old agreements, the duration of period for which the site or the
activity should be existing has not been defined.
Supervisory activities in connection with building site, construction, installation or
assembly project are also deemed to be permanent establishments, which are not so deemed
under the OECD Model Convention. Another example of an extended definition is found in a
treaty with UK where a sale outlets for receiving or soliciting orders is also deemed to
be permanent establishment.
Thus, Pakistani tax agreements cover site (building), project (construction or assembly),
activities (supervisory in connection with site and project) in the extended meaning of
permanent establishment. Even the sale outlets are included, as in the treaty with UK, or
the permanent sales exhibition as in the treaty with Austria, FGR, and Finland.
Any place of business which is related or associated with activity of building
construction or installation should be in existence for a specified period before it
qualifies to be designated permanent establishment, irrespective of the fact that such a
place independently would have been eligible to be so taken. For example, a workshop, or a
factory or a place of management which may be necessary as incidental or subsidiary to act
as 'feeding' activity to the activity of construction, etc., has to be present for the
period specified in the agreement, though these items are enumerated to be permanent
establishment in sub-paragraph (2). Such feeding activities have to be looked at in
the context of construction of building or installation or assembly or a project which
activity could be taken permanent establishment if it lasts for more than the specified
period. These are for all intent and purposes building sites having resemblance and
characteristic of the items mentioned in the sub-paragraph. Such resemblance is
coincidental.
35.1. Building site - The expression 'building site or
construction or installation of project' has not been defined in the OECD or UN Model
Convention. 'Building' in its ordinary and usual meaning is a block of brick or stone
covered by a roof.28 The ordinary and
usual meaning which is contemplated by this expression is any structure enclosing the
space within its walls with or without roof, if the structure is designed for inhabitation
or shelter, storage, trade, manufacture, worship, business, teaching and the like. Building in its general sense is anything built or
constructed. Thus, an open air swimming pool, or
a roofless large stadium constructed at a considerable expense would be building. Anything which is built is a building, such as
construction of roads, canals, bridges, the laying of pipelines, and excavating and
dredging.
35.2. Construction - Construction activity is a complex
activity involving the application of technical know-how, material and skill of trained
personnel, such as for the purpose of construction of dams, bridges, etc.
The six months test applies to each individual site or project. A site exists from the
date on which the contractor begins his work, including the preparatory work. Temporary
suspension of the work or interruptions in the activity .on account of non-availability of
material or labour or of capital or on account of weather or any other account should be
taken into consideration in calculating the period of six months. The site here refers
only the presence of the contractor in a country and not usually the geographical location
of the permanent establishment within that country. In fact the nature of activity is such
in some cases that shifting of 'site' from time to time becomes necessary such as in case
of construction of roads or canals or laying out the pipeline.
35.3. Installation - Activities relating to installation of
machinery or equipment are taken to be permanent establishments. For installation of
machinery, the relevance of time limit has no significance if such installation is a part
of the contract of sale. If the sale of machinery is. subject to its installation and
inspection, the sale is not complete till such installation has been done and inspection
made. A machinery or equipment could be sold either by its delivery straightaway or by its
delivery in the installed form. When the sale is contracted in the latter form, the
operation to install it is undertaken as accessory of sale which cannot be likened to the
type of activity as gives rise to a permanent establishment within the meaning and intent
of tax agreements. Thus, the building site or construction or assembly project or
supervisory activities in connection therewith could relate either to the transaction of
sale of machinery or equipment in the installed form or otherwise. In case of the former,
however, no time limit is normally prescribed for being regarded permanent establishment
if the charges of such project or activity exceed 10 per cent of the sale price of the
machinery or equipment. Thus, it was suggested that the following should be the guideline
for the bilateral agreement:
"A building site or construction or assembly project or supervisory activities in
Connection therewith, where such site, project or activity continues for a period of more
than six months, or where such project or activity, being incidental to the sale of
machinery or equipment, continue for a period not exceeding six months and the charges
payable for the project or activity exceed 10 per cent of the sale price of the machinery
or equipment."
This guideline was followed in the Pakistani tax agreements with many countries.
35.4. Substantial equipment - Some of the agreements include in
the concept of permanent establishment the substantial use or installation of equipment in
a foreign country by, or under contract with the enterprise. The substantial equipment
means substantial machinery, which does not include samples used in demonstration to
wholesalers and retailers and in training and demonstrations. The substantial machinery or
equipment contemplates the use of heavy or large machinery or equipment by such persons as
contractors or builders who as is well known, may move such equipment from place to place
in carrying out their operations.
Mere presence of substantial equipment belonging to a foreign enterprise in the host
country will not lead to the existence of permanent establishment. The equipment must be
used or installed for or under contract with the foreign enterprise. A single piece of
heavy machinery may constitute 'permanent establishment'. It need not necessarily mean a
large quantity of equipment. The substantial equipment also does not contemplate the mere
use of, say, freight cars of a foreign enterprise.
