In this article we would like to draw attention to a special risk in business in India, which always leads to unpleasant surprises and enormous problems. The so-called Assembly facility in India poses a high inherent risk, especially for companies in plant and mechanical engineering.
Based on the double taxation agreement (DTA) between India and Germany a fixed place of business through which the activities of a company are carried out in whole or in part (in India) is exercised, a Permanent establishment.
According to DBA Art. 5 (2) (i), the expression “permanent establishment” also includes (!) a construction or assembly or a related supervisory activity if its duration exceeds six months.
An example from practice:
A German medium-sized company sells an industrial plant to India. Beyond delivery
- the company itself provides assembly services on site with its own employees - or
- the company commissions an Indian subcontractor to carry out the assembly (an Indian company therefore works on site on behalf of the German company) – or
- A German employee takes over the supervisory role for the assembly work in India.
If the duration of the project lasts more than 6 months, then this leads to a permanent establishment under tax law!
Attention to deadlines: 180 days are enough to exceed the limit!
This deadline is not always known to medium-sized companies in particular. In other countries, such as France, Great Britain, Poland or the USA, the comparable mechanism only takes effect after twelve months. However, the German-Indian double taxation agreement regulates this more strictly. If the construction or assembly activities in India last longer than 180 days, an assembly site with the relevant regulations is already assumed.
Elastic definition of “assembly activity”!
Plant in India
Another and often unrecognized risk is that the term “assembly activity” is used quite broadly by the Indian authorities. It includes not only the actual construction, but also related supervisory activities.
This broad interpretation not only applies to employees of the parent company who work on site in India, but also includes Indian subcontractors who carry out this supervisory work on site on behalf of the foreign parent company.
This is exactly the case that happens very often in practice! An example: An Indian company buys a system including assembly in Europe, which is where the contractual partner and payment recipient is located. This European contractual partner then in turn commissions an Indian subcontractor (possibly even its own subsidiary) to carry out the actual assembly work on site in India. Often enough, not even a foreign employee travels to India for the new project - and yet the European company suddenly has an assembly facility there under Indian law!
Flexible interpretation of project duration, permanent establishment and taxation basis
For the purposes of Indian tax law, an assembly establishment also arises when several individual orders are geographically and economically related. For example, if a company delivers different machines, including assembly services, to the same facility at different times, this is already referred to as an “overall project”, even if individual contracts exist for each individual machine.
But other individual projects that do NOT exceed the deadline of 180 days for establishing an assembly establishment for tax purposes can also be negatively influenced by an existing establishment. In practice, once the Indian tax authority “recognizes” an assembly facility, it always tries to assign all of the plant manufacturer’s other projects running in India to this original facility. Auditors speak of “infecting”.
Because the company then no No PE (Permanent Establishment) Certificate can give more, from this point onwards every Indian customer who is supposed to make payments to the foreign company will immediately withhold 20 to 40 percent of the order amount to be on the safe side!
In the very worst case scenario, the Indian tax authority can also try not only to assess the taxes for the assembly or supervision services, but also to allocate all deliveries of goods (the exported machines and industrial plants) to the business premises! Such behavior should actually be excluded by the German-Indian double taxation agreement, but the arbitrariness of the Indian authorities often knows no limits.
How to: This is how you make contractual provisions!
This complex situation forces European plant manufacturers to be proactive and carefully draft contracts for their Indian business.
One of the most important measures is a so-called “contract splitting”:
- The Deliveries of goods between the European supplier and the Indian customer (“offshore”) must be contractually regulated separately from the assembly services.
- All provided by the Indian subcontractor Assembly services must be agreed as “onshore” transactions directly between the customer and the assembly service provider.
- About appropriate Additional agreements Operational and organizational details need to be clarified between the Indian subcontractor and German suppliers.
Without developing a clean contractual framework for your Indian assembly projects, you run the risk of unknowingly and unintentionally setting up an assembly facility in India - with all the negative implications in view Taxation and Jurisdiction in India.
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