IMAX's Five-Day Site Visit, 17-Day Installation Period Do Not Create Permanent Establishment In India: ITAT Delhi

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has recently held that IMAX Corporation, Canada, did not have either a fixed place Permanent Establishment (PE) or an installation/supervisory PE in India.

The tribunal held that a five-day site inspection visit and subsequent installation activities lasting only 17 days did not satisfy the conditions prescribed under the India-Canada Double Taxation Avoidance Agreement (DTAA).

Since no PE existed in India, the Tribunal held that no income could be attributed to the alleged PE.

A coram of Judicial Member Vikas Awasthy and Accountant Member Sanjay Awasthi allowed the appeal filed by IMAX Corporation for Assessment Year 2022-23 and rejected the tax department's allegation that the company had a taxable presence in India through its activities at Indian multiplexes.

IMAX Corporation, a Canadian tax resident, is engaged in the business of developing, selling and leasing large-format theatre systems globally. Associated with this activity, it also provides installation and related support services to customers and grants licences to use the IMAX trademark. The company had entered into agreements with Indian customers for the sale of theatre systems, installation services and trademark licensing.

The Assessing Officer alleged that IMAX had a fixed-place PE and an installation or supervisory PE in India. On that basis, the department sought to attribute income from installation services, theatre design services and other related receipts to the alleged PE.

The Revenue's case was that installation and related activities carried out at Indian multiplexes created a fixed place of business in India. It also alleged that installation and supervisory activities exceeded the 120-day threshold prescribed under Article 5(2)(k) of the India-Canada DTAA.

Before the Tribunal, IMAX contended that the multiplex premises belonged to its customers and were never at its disposal. It submitted that customers were responsible for constructing and preparing theatres before installation of the IMAX system. The company argued that it neither owned nor leased any premises in India and had no control over the multiplexes where the systems were installed.

The company further submitted that during the relevant financial year only one employee, Jim Krimbalis, visited India. The visit lasted from February 28, 2022 to March 4, 2022 and was limited to inspecting the customer's site before the arrival of the theatre system. According to IMAX, this was the only visit made by any of its representatives during the year under consideration.

IMAX pointed out that the theatre system arrived in India only on April 2, 2022. The actual installation was undertaken between September 13 and September 28, 2022 in the following financial year. It argued that the tax authorities incorrectly treated the February 2022 inspection visit as the commencement of installation activities for computing the 120-day threshold.

The company also argued that none of the recognised tests for establishing a fixed place PE were satisfied. It contended that it had no place of business in India, that the multiplex premises were not at its disposal, that there was no permanence or continuity of business activity in India and that the theatre systems, once installed, were operated entirely by customers for their own business activities.

After considering the rival submissions, the Tribunal agreed with IMAX. It held that none of the recognised tests for establishing a fixed place of PE, namely the place of business test, disposal test, permanence test and business activity test, were fulfilled in the present case.

The bench observed, “Thus, it deserves to be repeated that during the year under consideration there is only a five day visit by an employee of the assessee, however, even in the subsequent financial year the installation process lasted only for 17 days. Thus, whichever way one needs to consider this issue, it turns out that the 120 days threshold for considering an installation PE under the Indo-Canadian DTAA is not fulfilled. Thus, there is no installation or supervisory PE in India.”

On the allegation of an installation or supervisory PE, the Tribunal noted that the only activity attributable to the relevant year was the five-day inspection visit. It observed that even if the installation activities undertaken in the subsequent financial year were considered, the installation process lasted only 17 days. The Tribunal held that the 120-day threshold prescribed under the DTAA was therefore not breached.

Holding that neither a fixed place PE nor an installation or supervisory PE existed in India, the Tribunal ruled that no income could be attributed to the alleged PE. It accordingly allowed the appeal filed by IMAX Corporation.