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2017 (8) TMI 737 - AT - Income TaxComposite, continuous and inseparable project - computation of table income in India - turnkey project - P.E. in India - avoidance of tax by splitting the alleged composite contract into three different contracts - DTAA - whether all the three contracts are independent and separate from each other? - Held that:- A turnkey project itself indicates that it is composite contract which involves activities from the initial stage to the final stage. All the activities are either interlinked and interdependent or consequent to one another. The Hon’ble Supreme court in the case of Ishikawajima Harima (2007 (1) TMI 91 - SUPREME COURT) was dealing with the case of a turnkey project by a consortium in which the scope of work of each of the constituent of consortium was specified. The Hon’ble Supreme Court has held that A contract must be construed keeping in view the intention of the parties. Even in the case before us, though SCCL had issued a single tender document for whole of the project, the intention of the assessee to segregate the contract into three contracts was clear from the beginning. It negotiated with SCCL who ultimately agreed to execute three separate contracts with specific scope of work for each of the contracts and different time frames. Thus, the intention of the parties to have three different contracts is proved. In such circumstances, the findings of the authorities below, that all the three contracts are part of a single and composite contract are not sustainable. The question No.1 is accordingly answered in favour of the assessee. The consequential finding that in a composite contract, if there is a PE for one of the contracts, then the PE is there for all the contracts is also not sustainable. According to the revenue, the project office set up on 21.04.2008 is the PE even for the contracts I and II. This is not acceptable. Article 5(2) of the DTAA between India and Germany defines Permanent Establishment and clause (i) thereof includes a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. In the case before us, the activities under contract No.I did exceed six months. The contract was signed on 21.11.2006 while, DGMS approval was received on 18.10.2007 during which period the employees carried on the work of scientific site investigation and has also designed the mining method to be adopted for obtaining the optimum output as required under the contract. Thus, it can be said that there is a PE for contract I. The contracts II & III are to come into force only after approval of the DGMS is obtained. The results of the contract I are the basis for the design, manufacture and supply of the plant and equipment under contract II. The AO has not doubted the manufacture and delivery of the equipment outside India. His basis for bringing to tax a part of the income under contract II is that the findings of contract I are the basis for the design of the equipment and therefore part of the income is attributable to activities in India. Even if there is a PE in India for the contracts I and II, only such income which is attributable to activities of the assessee in India is taxable. There is no dispute that the entire activity of designing, (albeit with the information gathered during evaluation of the site and finalization of the project report during contract I), manufacture and delivery of the equipment including the payment was made outside India. Therefore, even if there was a PE for contract II, it cannot be said that the PE of the assessee had any role to play in any of the above activities. - Decided in favour of assessee.
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