THE conference on tax treaty case law around the globe that takes place in alternate years in Vienna and Tilburg brings together academics from European countries as also from the USA, Canada, India and other places to discuss important case laws in their respective countries. The conference is interesting in that apart from the cases that are widely reported in the English press, one has the opportunity to know about cases from non- English speaking countries as well. This year's conference that discussed the most important case laws decided in the year 2012 also had its fair share of unusual cases. I intend to bring to the notice of the readers some of such cases, particularly from the non-English speaking countries.

It is generally believed that Indian tax administration is extremely aggressive and creative in finding a PE of a foreign enterprise considering the fact that no taxation of business profits can take place in the absence of a PE. This simple principle is the root cause of zillions of tax planning exercise. To beat such planners in their own game, tax administrations often try to find a PE may be, at times being a bit creative about the issue and going out of a purely formalistic stance. And, India is not the only country to do so. Two case laws that were discussed in the Vienna conference bring forth the efforts of the Spanish tax administration to counter the erosion of its tax base by invoking the PE concept. None of these two cases have been reported in the mainstream media in India. The cases are the Roche case decided by the Spanish Supreme Court on 12 January 2012 (Appeal number 1626/2008), and the Dell case decided by the Spanish Central Administrative Court (TEAC) on March 15, 2012 (case number (00/2107/2007)

Roche case:

The verdict in the Roche case was eagerly awaited and was delivered by the Spanish Supreme Court after nine years of litigation. In a way, the case confirms the adverse view taken by the Spanish judiciary to attempts at eroding the Spanish tax base by relocating the value added functions within a multinational group. In giving its verdict, the Spanish Supreme Court took a view that was different from the much-discussed Zimmer case of France.

Roche Vitaminas, SA is based in Switzerland and had a subsidiary RV in Spain. Till the year 1999, RV, the Spanish subsidiary performed the functions of manufacturing, importing and distributing goods as a fully-fledged distributor. In the year 1999, there was a restructuring of business. Consequent to the restructuring, two contracts were signed between the parent and the subsidiary. In terms of one of the contracts, RV agreed to manufacture and pack products ordered by the parent and was to be remunerated at cost plus 3.3% mark up. In terms of another contract, the parent company designated the Spanish subsidiary as its agent for promoting the products and to present, protect and promote the interests of the parent. The Spanish subsidiary was to be remunerated at 2% on the sales.

The avowed objective of the restructuring was to save costs by centralizing functions in Switzerland. However, the subsidiary, from being a full-fledged distributor, now becomes a contract manufacturer and commission agent. Consequently, the profits it was entitled to, was much lower with the differential tax base being transferred to Switzerland and the Spanish tax base got correspondingly reduced.

Predictably, the tax department challenged the action of the taxpayer. It was of the opinion that the structure that was adopted resulted in a fixed place PE of the Swiss group company through the subsidiary. It also held that the Spanish subsidiary constituted an agency PE for the Swiss company.

The taxpayer challenged the assessment before the Central Administrative Court whichconfirmed the Tax Administration's position. Subsequently, a judicial Court also agreed with the view of the Revenue. Thus the case came up before the Supreme Court.

The Supreme Court found that the Spanish subsidiary had leased warehouse space to the Swiss parent but the same was covered by the exception relating to maintenance of a stock of goods for the purpose of storage, display or delivery of goods and was auxiliary and preparatory in nature in terms of the exception provided in Article 5(4). Therefore the Supreme Court held that there was no fixed place PE.

However, the Supreme Court found an agency PE despite the fact that the subsidiary did not have any authority to conclude contract on behalf of the principal. It was pointed out that the Spanish subsidiary manufactured product only for the Swiss parent, operated under the guidelines of the parent company and the only risk it undertook was not to operate within the parameters set by the parent company. The Swiss company, on the other hand bore all the risk of manufacturing. All the activities of the Spanish company was directed, organised and managed by the Swiss company.

Having found a PE, the Court also attributed all of the Swiss company's income from sales in Spain to the Spanish PE. It seems that the court also refused any allocation of expenses on the ground that the taxpayer had not proved the amount of allocable expenses.

Dell case :

Subsequent to the Roche case, there was another case decided by the Spanish Central Economic-Administrative Court that again confirmed that the activities of the subsidiary of Dell in Spain constituted a Permanent establishment or the Irish parent (Dell Products). In this case, the Spanish court also propounded the theory of online PE or virtual PE. The case is under appeal and one has to see what the ultimate decision of the higher Courts turn out to be.

This case also was a result of restructuring. Dell Europe, an Irish company manufactured computers in Ireland. Dell Products, another Irish company sold them in the market through various Dell subsidiaries. Dell Spain operated as a full-fledged distributor till 1995 when there was a restructuring and Dell Spain entered into a commissionaire agreement with Dell Products to act as an agent in its own name but on behalf of the Irish company. Dell Spain served the large and medium sized customers where as the small sized ones were catered to through a French subsidiary. Dell products did not have any employees or facilities in Spain. The authorities found that Dell Spain functioned as more than a commissionaire and was actively involved in the logistics, marketing, post-sell services and administration of the Spanish online store.

The administrative court agreed with the tax administration that Dell Products had a PE in Spain through the subsidiary Dell Spain both under Article 5.1 (fixed place PE) and also under Article 5.4 (agency PE). The argument of the Revenue was that essential part of the business functions was carried on using the premises and personnel of the Spanish subsidiary. Hence the activity of the Irish company should be considered as being carried on through a fixed place of business in Spain.

The Court held that the concept of fixed place of business should be flexible. In the present case, the premises of Dell Spain were being used de facto for rendering a service and making possible the activity of Dell Products Ireland.

As for the dependent agent PE, although the Spanish subsidiary did not act in the name of the Irish company, it was bound to follow the instructions of the Irish company relating to various aspects like pricing, copyright, and purchase of products. The fact that it was also the exclusive agent of the company was an important factor.

The most interesting part of the case is the theory of online PE or virtual PE. The tax administration pointed out that Dell Products, Ireland sold goods in Spain through a website dedicated to the Spanish market and the Spanish affiliate Dell Spain employed people to translate the website, review the contents and administered the site. It also owned the .es domain name.

Thus in the facts of the case the Irish company did not have any physical presence in Spain. The server that hosted the website was not located in Spain. There were no employees of the Irish company in Spain. Nevertheless, the Court held that there was a PE in Spain. As for the OECD prescription that a website per se does not constitute a PE, the Court referred to the observations of Spain: “ … Spain and Portugal do not consider that physical presence is a requirement for a permanent establishment to exist in the context of e-commerce, and therefore, they also consider that, in some circumstances, an enterprise carrying on business in a State through a web site could be treated as having a permanent establishment in that State…” It is interesting to note that Spain has removed its observation in the 2010 version of the OECD commentary. Therefore, application of the ambulatory approach of interpretation would have taken that into account.

Once having found the PE, the court also agreed with the Revenue's contention that all revenue derived from the Spanish market from the sales through the website should be attributed to the deemed PE.

Spain is a member of the OECD. Nevertheless, the Spanish Courts seem to be more eager to resort to interpretations that protect the tax base of the country. This is in contrast to the attitude of the Indian judiciary. These cases will demonstrate that it is unfair to say that the Indian tax administration is the most creative while finding a PE and attributing profits to the same.