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OECD Service PE clause vs. Service PE in Indian tax treaties

3.1. Basically, clause (b) of the OECD Service PE clause is somewhat similar to the Service PE provision under various Indian Tax Treaties, with few differences.

3.2. The Service PE clause in Indian tax treaties refer to ‘employees and other personnel’, whereas the OECD Service PE clause uses the term ‘individuals’. Clearly, the latter seems to be wider in scope. By using the term ‘individuals’ in the suggested provision, OECD intends to cover independent entrepreneurs carrying on business through performance of services in the source state. However, it may be noted that in certain circumstances, services rendered by independent entrepreneurs may fall within the purview of Independent Personal Services clause under the UN Model / Indian tax treaties.

3.3. Further, the Indian tax treaties focus on performance of services vis-à-vis computing the threshold for triggering a Service PE, the UN Model Commentary is silent with respect to calculation of number of days. The OECD Commentary update suggests that one needs to consider only working days in the context of the Service PE Article vis-à-vis clause (b) of the Service PE clause (which is similar to Service PE provision in Indian tax treaties).

3.4. The OECD Service PE clause specifically refers to the concept of ‘supervision and control’ of individuals rendering services in source country by the foreign enterprise, so as to constitute a Service PE of the latter. However, such a concept is normally not stipulated under Indian Tax Treaties. An issue arises as to whether such a concept needs to be implied within Indian Tax Treaties in the context of Service PE. While the issue is debatable, a better view seems to suggest that one should read the concept of ‘supervision and control’ into the Indian tax treaties also.

CBDT maintains tolerable limit of 5% for Assessment Year 2012-13

The CBDT has issued a long awaited important notification no. 31/2012 to provide that where
the variation between the arm's length price determined under section 92C and the price at
which the international transaction has actually been undertaken does not exceed five percent
(5%) of the latter, the price at which the international transaction has actually been undertaken
shall be deemed to be the arm's length price for Assessment Year 2012-13.


NOTIFICATION NO
31/2012, Dated: August 17, 2012
In exercise of the powers conferred by the second proviso to sub-section (2) of section 92C
of the Income Tax Act, 1961 (43 of 1961), the Central Government hereby notifies that
where the variation between the arm's length price determined under section 92C and the
price at which the international transaction has actually been undertaken does not exceed
five percent of the latter, the price at which the international transaction has actually been
undertaken shall be deemed to be the arm's length price for assessment year 2012-2013.
[F.No. 500/185/2011-FTD I]


(Mrinalini Kaur Sapra)
Under Secretary to the Government of India

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