TMI Blog2016 (2) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. The ITAT had considered the contract and in view of the fact that the consideration for various activities such as design and engineering, material procurement, fabrication, transportation, installation and commissioning had been separately specified, the Tribunal rightly held that the consideration for the activities carried on overseas could not be attributed to the Assessee's PE in India Assessee did not have a PE in India during the AYs 2007-08 and 2008-09, no income of the Assessee from the projects in question can be attributed to the Assessee’s PE. The assessment orders dated 26th October, 2010 and 18th November, 2011 for the AYs 2007-08 and 2008-09 respectively as well as the corresponding orders passed by the ITAT in the corresponding appeals are set aside. - Decided in favour of assessee. - ITA 143/2013, ITA 533/2013, ITA 144/2013, ITA 795/2014 - - - Dated:- 29-1-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar and Mr Pawan Kumar, Advocate For the Respondent : Mr N. P. Sahni, Senior Standing Counsel with Mr Nitin Gulati, Advocate. JUDGMENT Vibhu Bakhru, J 1. These appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble Taxation Avoidance Agreement between India and UAE. 2. Whether the Income Tax Appellate Tribunal was justified and correct in holding that the installation permanent establishment under Article 5(2)(h) of the Double Taxation Avoidance Agreement between India and UAE is not dependent on the date of actual start of execution of the contract but had come into existence on the date of award of contract? 3. Whether the income Tax Appellate Tribunal was right in holding that Arcadia Shipping Ltd. was a dependent agent permanent establishment of the appellant in India under Article 5 of the Double Taxation Avoidance Agreement between India and UAE. 4. Whether the Income Tax Appellate Tribunal has not attributed and determined the taxable income under installation and commissioning; whether the said issue/question has remained undecided and the effect thereof. 5. Whether the order of the Income Tax Appellate Tribunal violates and is contrary to Article 7(6) of the Double Taxation Avoidance Agreement between India and UAE. 5. The following questions of law were framed in the appeals preferred by the Revenue (ITA 795/2014 and 533/2013):- 1. Did the ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to survey, installation and commissioning were done entirely in India, the platforms were designed, engineered and fabricated overseas - at Abu Dhabi. A tabular statement indicating the activities carried out in India and overseas as asserted by the Assessee, is reproduced below:- Activity Inside India (i.e. Installation and Commissioning) Outside India (Abu Dhabi) (i.e. Fabrication) Survey (Pre-Engineering, Pre-construction / Preinstallation Design Engineering Procurement of material Fabrication Load out, Tie down, towout and transportation of fabricated structure to India Partly Partly Installation, submarine cable laying Hook-up, testing, precommissioning Start up commissioning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Permanent Establishment (PE) and that the Assessee s Project Office constituted a PE of the Assessee in India. The DRP reasoned that: (i) the Assessee itself had shown the Project Office as its PE in the earlier years as well as in the AY 2007-08 and had subsequently sought to change its stand on the basis of the ITAT s judgment in the case of DCIT v Hyundai Heavy Industries Limited; (ii) the Assessee had informed the Reserve Bank of India that its Project Office was for the purposes of undertaking the project with ONGC and this established that the Project Office was established to undertake the project and not any ancillary or auxiliary activity; (iii) before submitting the bid, Assessee undertook a pre-bid survey and the Assessee s communication to ONGC indicated that the Assessee had familiarized itself with the Marine Sea, Land-surface and sub-surface, metrological, oceanographic, climatological and environmental conditions which may exist in the installation area. Further, the Assessee had also familiarized itself with other aspects of the project. This, according to the DRP, indicated that the pre-bid survey was conducted through the Project Office which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came into existence at the stage of commencement of the contract. The DRP observed that pre-engineering or predesign survey which was claimed to be done by a sub-contractor employed by the Assessee was an integral part of the contract and the time spent by the subcontractor would also constitute the time spent by the Assessee under the DTAA. Thus, the DRP reasoned that the existence of a PE would commence from the date the sub-contractor started his job at the site of ONGC. 8.3 The DRP rejected the contention that the contract was a divisible contract and the income of the Assessee for the activities done outside India was not taxable under the Act. The DRP held that the title in the goods passed to ONGC in India and on the said basis distinguished the judgment of the Supreme Court in the case of Commissioner of Income Tax Anr. v. Hyundai Heavy Industries: (2007) 291 ITR 482 (SC) where platforms were delivered to the agents of ONGC in Korea. For the same reason, the DRP also held that CBDT Instruction No. 1767 was not applicable to the facts of the present case. 8.4 The DRP also concurred with the AO that the payment in respect of drawings and design were FTS and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in India and its role was not limited merely for collecting information as claimed by the Assessee. 10.2 The ITAT rejected the Assessee s contention that its Installation PE existed only when the barges carrying the platforms entered the territorial waters of India. It concurred with the AO s decision that the Assessee had a PE in India even prior to the notification of award of the contract. 10.3 However, the ITAT accepted the Assessee s contention that the contract in question could be segregated into offshore and onshore activities and the Assessee s income for the activities carried out outside India could not be attributed to its PE in India. Accordingly, it held that the profits attributable to design, procurement of material and fabrication could not be taxed in India. The ITAT rejected the Assessee s contention that the tax payable should be computed as per the formula adopted in the preceding years (i.e. 10% of the receipts attributable to activities in India less expenses in India and 1% of the receipts attributable to activities carried out overseas). The ITAT also did not accept the Assessee s contention that Section 44BB of the Act was applicable. Submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd.: (1991) 39 ITD 59 (ITAT[Del]) in support of its contention that the back office function of collection of information was specifically excluded from the purview of PE by virtue of Article 5(3)(d) and 5(3)(e) of the DTAA. 11.3 Mr Aggarwal further contended that in terms of article 5(2)(h) of the DTAA, the Installation PE would come into existence only if the construction or assembling activity continued for a period of nine months or more in India. He argued that the earliest date which could be considered for calculating the period would be the date when the barges with the fabricated platforms reached the work site, that is, on 19th November, 2006. Mr Aggarwal submitted that the pre-engineering and pre-construction surveys were carried out by an independent Indian company for a period of 9 days and 27 days respectively and the same did not entail assuming control over the work site. He argued that the activities of the independent sub-contractor could not be included for calculating the period of nine months under Article 5(2)(h) of the DTAA. He further submitted that the time taken for pre-bid activities, notification of award, signing of the contract and meetings wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321 (SC) and contended that the Assessee cannot be permitted to depart from its consistent stand that had been sustained over the past several years. 12.1 Mr Sahni next referred to The Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 issued by the Reserve Bank of India as amended on 2nd July, 2003 and drew the attention of this Court to the definition of 'project office' which is defined as a place of business to represent the interest of the foreign company executing a project in India but excludes a liaison office . He contended that in the circumstances, the Assessee s contention that the project office had no role to play in the execution of the project was contrary to the record. 12.2 Mr Sahni also controverted the Assessee s stand that the Project Office was only involved in preparatory and auxiliary activities and consisting of only three employees. He submitted that the reliance placed by the Assessee on the annual accounts of the PO was not justified as it did not include the cost of supplies and expenses which were incurred and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interruptions in the minimum period should also be included for determining the minimum period. He also referred to the extracts from the commentary by A. Skaar in support of his contention that time spent on onsite planning would also be included in computing the duration while considering whether a PE of an enterprise existed. 12.5 Mr Sahni next urged that ASL was appointed as the sole and exclusive agent and under the terms of the consultancy agreement had agreed not to represent a competitor of the Assessee or act in a manner detrimental to the Assessee s interest. ASL had also participated in the pre-bid meeting held on 23rd August, 2005 and the kick-off meeting held on 16th December, 2005. He contended that in the circumstances, ASL constituted a DAPE of the Assessee in India. He further submitted that ASL had no discretionary powers and was acting at the instance of the Assessee and in the circumstances, even though ASL had substantial revenue from other activities, it could not be construed as an independent agent as far as the project in question was concerned. 12.6 In regard to the issue of attribution of income, Mr Sahni contended that Article 7(6) of the DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA. The other two questions relate to the attribution of income to the Assessee s PE. Thus, at the threshold, it would be necessary to refer to the text of Article 5 of the DTAA for ascertaining whether the Assessee had a PE in India during the relevant period. Article 5 of the DTAA is reproduced as under:- 1. For the purposes of this Agreement, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; (g) a farm or plantation ; (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; (i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions framed by OECD, United States and United Nations. Subparas (h) and (i) of paragraph 2 of Article 5 of the DTAA specifically includes a building site or an assembly project and furnishing of services within the definition of a Permanent Establishment . The subject matter of clauses (h) and (i) are partly covered under paragraph 3 of Article 5 of the said Model Conventions and the same would be referred to while considering the second question which specifically relates to Article 5(2)(h) of the DTAA. 15. In order to determine whether an enterprise has a PE within the meaning of Article 5 of the DTAA, it would be necessary to consider the scheme of Article 5. Paragraph 1 of Article 5 provides an overarching general definition of the expression Permanent Establishment (PE). It defines a PE to mean a fixed place of business through which the business of an enterprise is wholly or partially carried on. It is clear from the aforesaid definition that the expression Permanent Establishment entails (a) a fixed place of business; and (b) business of the enterprise being carried on wholly or partially through the said fixed place of business. These two conditions must necessaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an enterprise unless they exist for a period of atleast nine months. 17. Paragraph 3 of Article 5 is an exclusionary clause and is intended to exclude certain places of business from the scope of the expression Permanent Establishment . Paragraph 3 begins with a non-obstante clause Notwithstanding the preceding provisions of this Article . Thus, the exclusions provided under paragraph 3 would override the provisions of paragraph 1 2 of Article 5 of the DTAA. In other words, even if a place of business squarely falls within the definition of paragraph 1 of Article 5 and is specifically listed in paragraph 2 of the said Article, the same would, nonetheless, not be construed as a PE of an enterprise, if it falls within any of the exclusionary clauses contained in sub-paras (a) to (e) of paragraph 3 of Article 5 of the DTAA. 18. Paragraph 4 of Article 5 of the DTAA provides for a legal fiction to include an agent (other than an agent of an independent status) to be a PE of the principal enterprise. Paragraph 4 also begins with a non-obstante clause. Thus, even though an agent may not stricto senso fall within the definition of a permanent establishment as defined under pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of the DTAA. First of all, the business of an enterprise must be carried on, wholly or partially, through the office in question; secondly, the business activity carried on must not be that of a preparatory or auxiliary character. The question, thus, arises is whether the activities carried out by the Assessee through its Project Office at Mumbai are that of a preparatory or auxiliary character. This is the bone of contention between the Revenue and the Assessee. 21. The Assessee had established its office at Mumbai in 2005, intimation to this regard was sent by the Assessee to the Reserve Bank of India on 24th January, 2006. The said office was established as a project office within the meaning of Section 2(f) of the Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000. The definition of project office expressly excludes liaison office as defined under Section 2(e) of the said Act. Liaison Office and Project Office are defined under Clause (e) and (f) of Section 2 of the said Act as under:- (e) liaison office means a place of business to act as a channel of communication between the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Cl.7.3) and a copy of permission from Reserve Bank of India for opening Project office in India (in the case of foreign bidders). A clause similar to the one above was also agreed to between ONGC and the Assessee under the C-Series Contract. 24. It is the Assessee s case that its office at Mumbai was opened only to comply with contractual requirements and the exchange control regulations and was used only as a communication channel and not for the execution of the Contracts. The Project Office was only used for the purposes of correspondence and as a communication channel; apart from that, the Project Office had no role to play in the execution of the activities under the Contracts and no other business of the Assessee was carried on through the Project Office. The Project Office was manned by three employees; (i) Ravi K. Prabhakar; (ii) Pavithran; (iii) Vijayan. While Ravi K. Prabhakar was designated as a Logistics Coordinator, Pavithran and Vijayan were employed as Office Assistants. The said persons were only engaged in collecting information from ONGC or ASL and transmitting the same to the Assessee s office in Abu Dhabi and similarly transmitting communications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character . 27. A Division Bench of this Court in UAE Exchange Centre Limited (supra) considered a case where a UAE based enterprise maintained a liaison office in India and the only activity of that office was to download information contained in the main servers located in UAE on the basis of which cheques were drawn on banks in India. The said cheques were couriered or dispatched to the beneficiaries in India keeping in mind the instructions of the remitters. This Court held that the said activity was only in aid and support of the main activity of the Assessee in that case and, thus, such activity was auxiliary in character. In DIT (International Taxation) v. Morgan Stanley Company Inc.: (2007) 292 ITR 416 (SC), the Supreme Court held that the back office operations carried on at an office would fall within the exclusionary clause of Article 5(3)(e) of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imitation as expressed is only with regard to the AO. 31. Thus, the first question framed in the Assessee s appeals is answered in the negative, that is, in favour of the Assessee and against the Revenue. 32. It is also relevant to state that the exclusionary clause of Article 5(3)(e) would apply equally to a place of business falling within the Article 5(2)(h) as it would be an office falling within the scope of Article 5(2)(c) of the DTAA. Thus, the Assessee also cannot be stated to have a permanent establishment under Article 5(2)(h) of the DTAA. In this view, although it is not necessary to consider the second question, nonetheless, we consider it appropriate to do so. 33. In terms of clause (h) of paragraph 2 of Article 5 of the DTAA, a building site or construction or assembly project or supervisory activities in connection therewith would also constitute a PE of an enterprise subject to that site, project or activity continuing for a period of atleast nine months. Clearly, the purpose of the said clause is also to include a building site or a construction or an assembly project as a PE by itself. On a plain reading, a PE constituted by a building site or a constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the construction work is installed at some other place. In such an event, preparatory and ancillary work is already connected with the building works proper, provided the former directly serve the operation of the building site (likewise OstBMF 3 SWI 19 (1993): DTC Austria; USSR). Providing for such an early beginning of the minimum period is the best way of taking the technical and economic nature of building works into account and it also avoids the practical difficulties of having to draw the line between ancillary activities and building works proper . 35. The aforesaid passage also clearly indicates that the duration of a permanent establishment would commence with the performance of business activities in connection with the building site or assembly project. 36. The activities at site carried on by any contractor through a sub-contractor would not count towards the duration of the contractor s PE, as in that case, the construction site or project cannot be construed as a fixed place of business of the contractor and would fail one of the essential tests of paragraph 1 of Article 5 of the DTAA. This, of course, would not hold good if the contractor's offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have access to the site in question is excluded, the aggregate period would be less than nine months and this would exclude the applicability of Article 5(2)(h) of DTAA. It is implicit in the expression 'Permanent Establishment' that there should be some degree of permanency of the fixed place of business before it can be construed as a PE of the Assessee. Thus, although a building site or a construction has been recognised as a PE, the same is conditional on the site/project representing an enterprise's fixed place of business - through which the business of the enterprise is carried on - for a minimum period of nine months. In the facts, where an enterprise is not granted access to the site for a long duration and carries on no activity at site during that period, the site could hardly be construed as the fixed place of business of an Assessee during that period. 40. We are also unable to accept the Revenue s contention that since the duration of the project itself exceeded nine months, the duration test under Article 5(2)(h) of DTAA would stand satisfied. A careful reading of Article 5(2)(h) of DTAA indicates that it is necessary that the site, project or activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACTIVITIES: Your Directors are pleased inform that your Company in association with subsidiary Company M/s. Supreme Offshore Construction Technical Services Ltd, have executed a Prestigious Contract for Modification works of 4 Well Platform Project of ONGC, through, NPCC, Abu Dhabi, who are the main Contractor. The Contractor included Engineering, Procurement, Fabrication and the offshore installation which is under execution now. Further your Company also provided Agency Services/Logistic Support etc to VMGL/VMML during their execution of JERP Project of Reliance as main contractor. Similar Services were also provided by your Company to VMML for execution of Erection Pre-commissioning of Offshore Crude Handling Project of Essar Port Terminals, Vadinar. The Services to all the above projects were rendered to the satisfaction of clients. 44. It is apparent from the above that ASL s activities were not limited to providing services to the Assessee but extended to various other activities. ASL also provided logistics and consultancy support to various companies other than the Assessee. The Director s Report also clearly indicates that the activity of providing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement clearly indicates that the contracts would be tendered for and executed by the Assessee. The Assessee had also duly disclosed ASL to be its agent involved in the contract as well as the remuneration payable to ASL. The representatives of ASL were present at the pre-bid meeting held with ONGC on 23rd August, 2005 as well as at the kick-off meeting held on 16th December, 2005 as representatives of the Assessee. The presence of ASL at such meeting was clearly in pursuance of the services agreed to be rendered by them. However, this by itself cannot lead to an inference that ASL constituted a DAPE of the Assessee in India. 48. At this stage, it would be relevant to refer to Article 5(4) and 5(5) of the DTAA which reads as under:- 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of independent status to whom paragraph 5 applies is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Assessee. The agreement entered into between the Assessee and ASL is also on principal-to-principal basis. 51. Even otherwise, there is material to support the view that the Assessee would bid and execute contracts in its name. The consultancy agreement does not authorise ASL to conclude contracts on behalf of the Assessee. It is also noteworthy that while the officials of ASL were present at the kick-off meeting held on 16th December, 2005, so were the other officers of the Assessee. Although, the correspondence between the Assessee and ASL indicated that ASL was involved in the project since the pre-bid meeting and had also acted on behalf of the Assessee, it cannot be concluded that ASL was habitually authorised to conclude contracts on behalf of the Assessee. 52. In view of the above, ASL cannot but be considered as an agent of independent status to whom paragraph 5 of Article 5 of the DTAA applies. In this view, ASL would not constitute a DAPE of the Assessee in India. 53. In view of our conclusion that the Assessee did not have a permanent establishment in India, the question of attributing any income of the Assessee to the PE does not arise. However, the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income tax is charged in respect of the total income of every person. The scope of total income is described under Section 5 and by virtue of Section 5(2) of the Act, the total income of a person who is a non-resident includes income which - (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. 58. Section 9 of the Act provides for income that is deemed to accrue or arise in India. By virtue of Section 9(1)(i) of the Act, all income which accrues or arises directly or indirectly from any business connection in India could be deemed to accrue or arise in India. If income of a foreign company is found to be taxable under the Act, it is next to be seen whether the same can still be taxed in terms of a bilateral agreement, if any, between India and the country where the foreign company is domiciled. Thus, without going into the question whether the incomes attributable to design, procurement of material and fabrication of platforms are otherwise taxable under the Act and assuming it is so, it would still have to be determined whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate profit centre vis-a-vis. the foreign enterprise (the Korean GE, in the present case). This demarcation is necessary in order to earmark the tax jurisdiction over the operations of a company. Unless the permanent establishment is treated as a separate profit centre, it is not possible to ascertain the profits of the permanent establishment which, in turn, constitutes profits arising to the foreign GE in India. The computation of profits in each permanent establishment (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the permanent establishment are computed as independent units. However, in a case where the Government of India has entered into a tax treaty with a foreign country (Korea, in the present case) then in relation to an assessee to whom such tax treaty applies, the provisions of the Act shall apply only to the extent to which the provisions thereof are more beneficial to the assessee. 60. In the present case, the consideration of various activities has been specified in the contracts in question. Annexure C (Contract Price Schedule and Rental Rates Schedule) specific ..... X X X X Extracts X X X X X X X X Extracts X X X X
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