The Supreme Court of Pakistan has recently ruled on the Snamprogetti Engineering1 case, adjudicating the controversy involving the existence of a permanent establishment (PE) and chargeability to tax of Pakistan-source income under the Pakistan-Netherlands Double Taxation Treaty (DTT).
The petitioner was a Dutch-resident company, contracted with a Pakistani firm to provide engineering services for the plants and for procurement of spare parts for two years for a fertiliser complex project in Pakistan. The petitioner was not responsible for construction or management. The tax return was filed by declaring income from engineering services as exempt income under Article 7 of the DTT.
At the assessment stage, the Assessing Officer (AO) determined that the petitioner had a PE in Pakistan in terms of paragraphs 3 and 4 of Article 5 of the DTT, arguing that the petitioner was involved in construction, as well as design and engineering, and their physical presence in Pakistan was necessary for contract implementation. Paragraph 4 of Article 5 of the DTT determines that a service PE is constituted, where the furnishing of services in Pakistan lasts for a period or periods aggregating more than four months within any 12-month period.
In a first appeal, the Commissioner Appeals (CIRA) overturned the assessment order, stating that the petitioner’s employees’ stay in Pakistan (97 days) was less than the four-month threshold for a PE under paragraph 4 of Article 5 of DTT.
Upon the AO’s appeal, the Appellate Tribunal Inland Revenue (ATIR) ruled that the petitioner had a PE in Pakistan. ATIR argued that the project was indivisible, its taxability should be considered in its entirety and the project’s implementation period exceeded the four-month threshold.
In response to the tax reference, the High Court noted that the services provided weren’t dependent on the number of employee visits or their physical presence. It emphasised that the continuous provision of services in Pakistan for more than four months within any 12-month period constituted a PE. Thus, the petitioner was deemed to have a PE in Pakistan.
The Supreme Court examined the OECD’s Model Tax Conventions, the Vienna Convention on the Law of Treaties and Article 5 of the DTT to reach its decision. The summary of the Supreme Court’s verdict is below:
- The view of the AO regarding the involvement of the Petitioner in the construction activities is not supported by the records. Therefore, paragraph 3 of Article 5 has no relevance to the case and only paragraph 4 of Article 5 was relevant for the purpose of determining the existence of a PE.
- The Supreme Court endorsed the approach taken by the CIRA for calculating the period of four months necessary for the activity of furnishing services to constitute a PE. It was observed that wording used in paragraph 4 ibid with respect to the period shows that there may be several periods, interspersed with breaks, during which services are provided. If the aggregate of these periods crosses the threshold of four months within any period of 12 months, a PE will be considered as constituted.
- The Supreme Court disapproved the view of ATIR that the whole project was indivisible, and taxability of project execution must be in its entirety; the entire period of project being far more than four months.
- The Supreme Court also did not concur with the findings of the High Court that the obligation of the Petitioner relating to the provision of services was in respect of the construction of plants at the site and continued for the entire period of the validity of the contract. The basis used by the Supreme Court was that the Petitioner’s contract was only confined to engineering services.
- The Supreme Court went on to conclude that since the Petitioner’s personnel only stayed in Pakistan for 97 days in total, which falls short of the threshold of four months, the Petitioner could not be placed in the category of a PE set out in paragraph 4 of Article 5 of the DTT. Accordingly, the income derived by the Petitioner from the provision of engineering services to the local company, being not attributable to a PE located in Pakistan, is not taxable in Pakistan. The judgement of the High Court and Order of ATIR were disregarded, while the order of CIR(A) was restored.
This decision of the Supreme Court addressed the issue pertaining to a PE as a result of providing services with specific consideration to Article 5 of the Pakistan-Netherlands DTT. The judgement will only apply to cases where the facts and provisions of applicable DTT correspond with the case before the Supreme Court. A notable feature of this case is that the Petitioner had not registered a branch office in Pakistan; and moreover, the Pakistan-Netherlands DTT does not contain a specific article to tax ‘Fees for Technical services’.
