Force of Attraction. – TaxDose.com

The concept of Force of Attraction (FoA) has been adopted in some of the tax treaties which India has signed with other countries. This concept is applied in order to determine the tax base of a foreign enterprise in the other State. In order to determine the tax base in other State, it is necessary to determine the existence of a Permanent Establishment (PE) in the other State. The concept of FoA is also used in determining the existence of PE in the other State.

The aforesaid concept can be illustrated by referring to some of the Double Taxation Avoidance Agreements(DTAA) where this concept has been applied and where this concept has not been applied.
In this regard reference may be made to the Indo-USA DTAA. The concept of FoA has been used in this DTAA. Article 5(2)(k) of the DTAA provides as under:
“2. The term “permanent establishment” includes especially :
(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period ;
The language “together with other such sites, projects or activities, if any” makes clear that in determining period of 120 days, other sites/projects/activities will also have to be considered together. This situation is popularly referred as a FoA clause.
Other DTAAs where FoA concept has been applied are Denmark, Belgium. Australia etc.
On the other hand, the concept of FoA has not been used in certain DTAAs. Reference may be made to Article 5(4) of the Indo-Japan DTAA.:
An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.
The term “together with other such sites, projects or activities, if any” has not been used in the above Article. Similar position also exists in DTAAs with Mauritius, Malaysia, Singapore etc.
Article 5(3) of the Indo-Singapore DTAA reads as under:
A building site or construction, installation or assembly project constitutes a permanent establishment only if it continues for a period of more than 183 days in any fiscal year.
In this case also FoA has not been applied. Therefore, if different projects are being carried on by a Singaporean company in India, each project will have to be considered separately for the purpose of establishing PE in India.
Reference in this regard may also be made to the recent decision of Hon’ble Authority for Advance Ruling in the case of Tiong Woon Project & Contracting Pte. Limited (AAR No 975 of 2010). The applicant, a Singaporean company was carrying on four projects in India. The applicant submitted that these projects are independent of each other and secured through independent work orders. Therefore, they should not be clubbed together for determining the period of activity in India. The revenue contended otherwise.
The Hon’ble AAR vide its order dated 19.09.2011 held that “in the given facts of the case, aggregation of the periods of the contracts cannot be made for these four contracts and consequently the applicant cannot be said to have a PE in terms of Article 5.3 of the DTAA”
Similar view was taken by the ITAT Delhi in case of Sumitomo Corporation vs Deputy CIT [114 ITD 61] with reference to Indo-Japan DTAA.
It may be clarified that the above precedent will be relevant only in those DTAAs where FoA does not exist. Where “Force of Attraction” clause exists, the above case cannot apply.
Foreign companies are therefore advised to carefully analyse their relevant DTAA vis-a-vis FoA in order to determine whether a PE exists in India or not.