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National Petroleum Construction Company And Others Versus Director of Income Tax (International Taxation) And Others

2016 (2) TMI 47 - DELHI HIGH COURT

Taxability of income earned by the Assessee in respect of a contract entered into by it with ONGC Limited, a public sector enterprise (hereafter ‘ONGC’) - existence of an Assessee’s PE in India in terms of Article 5 of the DTAA - whether income from the contract in question is not taxable under the Act by virtue of the Double Taxation Avoidance Agreement between India and United Arab Emirates (UAE)? - Held that:- Annexure C (Contract Price Schedule and Rental Rates Schedule) specifically assigns .....

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he Assessee's PE in India. 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- .....

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, 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 appeals have been filed under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) calling into question orders dated 5th October, 2012 and 31st January, 2013 passed by the Income Tax Appellate Tribunal (hereafter the ITAT ) in ITA No. 5168/Del/2010 and ITA No. 5763/Del/2011 respectively. The s .....

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mited, a public sector enterprise (hereafter ONGC ).The aforesaid contract entailed designing, engineering, procurement, fabrication of fully loaded offshore platform and its installation, testing and commissioning at an offshore facility of ONGC. According to the Revenue, the income from the said contract is liable to be taxed in India as the Assessee is stated to have a Permanent Establishment (PE) in India. According to the Assessee, its income from the contract in question is not taxable und .....

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he contractual receipts from ONGC were separable and the amount received for fabrication and supply of platform outside India was not taxable under the Act. This has led both the Assessee and the Revenue to assail the orders passed by the ITAT. 4. These appeals were admitted and the following questions of law were framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013):- 1. Whether the Income Tax Appellate Tribunal was correct in holding that the appellant had a fixed place o .....

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ther 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 Appel .....

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case question no.(2) is answered in favour of the Revenue, the appropriate margin of profit attributed, i.e. 25% and 28%. 6. Briefly stated, the aforesaid questions arise in the backdrop of the following facts:- 6.1 The Assessee is a company incorporated under the laws of UAE and is a tax resident of that country. The Assessee is, inter alia, engaged in fabrication of petroleum platforms, pipelines and other equipment and in addition, the Assessee also undertakes contracts for installation of p .....

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after referred to as 4WPP Contract ). The Assessee had tendered for the aforesaid contract pursuant to a global tender floated by ONGC in July, 2005. This was the third contract between the Assessee and ONGC. Subsequently, the Assessee entered into another contract for C-Series Project (termed as Contract No. MR/OW/MM/C-Series/03/2006, hereafter referred to as C-Series Contract ) on 23rd November, 2006. 6.2 The scope of work as described in the General Conditions of Contract of both the 4WPP Con .....

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ies as described in the bidding document . 6.3 The said contracts included various activities. Whilst the activities relating 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. .....

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essee s income under the Act has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India less verifiable expenses at the rate of 10% and the receipts pertaining to activities outside India at the rate of 1%. The Assessee also adopted the said basis for computing its assessable income and filed its returns for AY 1999-00 onwards accordingly. The returns filed by the Assessee for AY 2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of .....

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ed a Dependent Agent PE (hereafter also referred to as DAPE ) of the Assessee in India. In addition, the AO held that the Assessee also had a Installation/Construction PE in India. 7.1 Insofar as the Assessee s contention that the fabricated material was sold to ONGC outside India is concerned, the AO held that the contract was a turnkey and a composite contract and was not divisible as claimed by the Assessee. Accordingly, he held that the entire contractual receipts including the activities pe .....

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ties carried out by the Assessee were not covered under that Section. 8. The Assessee did not accept the Draft Assessment Order and filed its objections before the Dispute Resolution Penal ( DRP ). The DRP held that Article 5 of the DTAA provided an inclusive definition 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 .....

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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 was directly connected with the contract in qu .....

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the hard copy of the design was received by ONGC; (vi) that the contract lasted for approximately two years and it was not possible for a contract of this magnitude to be executed without the Assessee having a fixed place of business in India; (vii) the Assessee s office in India provided a fixed place for the employees of the Assessee visiting India for execution of the project from time to time and it was not necessary that the permanent employees at the Project Office be directly involved in .....

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Assessee was mentioned as ASL s address in the application to the Ministry of Home Affairs. 8.2 The DRP rejected the Assessee s contention that it had an Installation PE as described under Article 5(2)(h) of the DTAA for a duration of less than nine months and, therefore, the same could not be considered as a PE of the Assessee in terms of the DTAA. The DRP held that since the Assessee had contended that payments for engineering, procurement of material and fabrication could not be treated as FT .....

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or 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 he .....

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design were FTS and in the event it was held that the Assessee did not have a PE in India, the aforesaid payment would be taxable under the Act as FTS. The DRP also rejected the Assessee s contention that Section 44BB of the Act was applicable. It held that the contract in question was a turnkey contract in the nature of a works contract and could not be considered as a contract for services as envisaged under Section 44BB of the Act. 8.5 As regards the computation of profit is concerned, the DR .....

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hereafter, the AO passed an assessment order dated 26th October, 2010 under Section 143(3) read with Section 144C of the Act. Proceedings before the ITAT 10. Aggrieved by the assessment order, the Assessee preferred an appeal before the ITAT. The ITAT concurred with the AO and rejected the Assessee s contention that it did not have a PE in India. The ITAT observed that the Assessee had itself shown the Project Office in Mumbai as its PE in India and the Assessee s employees were present during t .....

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ITAT concluded that the Assessee s Project Office in India was its PE. 10.1 The ITAT concurred with the AO that ASL was a DAPE of the Assessee. The ITAT concurred with the finding of the AO/DRP that ASL was working wholly and exclusively for the Assessee. The ITAT held that ASL s presence in the business meetings also indicated that ASL was engaged in the hard core business development activity of the Assessee in India and its role was not limited merely for collecting information as claimed by .....

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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 ITA .....

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ay. He pointed out that the addresses of the project offices in the past were different and the said project offices had been established only for the contracts entered into earlier. He submitted that, therefore, the existence of the Assessee s project offices in the past could not be linked to the Project Office established for the purpose of the contracts in question. He argued that the AO erred in holding that the Assessee had carried its business in India through a PE by alluding to the proj .....

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-principal basis. He contended that the finding that the Project Office was involved in pre-bid meetings and/or survey and/or kick-off and/or review meetings was erroneous as these meetings were attended by the Assessee s employees from Abu Dhabi and the Project Office was not involved. 11.2 Mr Aggarwal contended that the Project Office acted as Assessee s backoffice for liaison, coordination and collection of information from ONGC. Mr Aggarwal relied upon the decisions in CIT v. BKI/HAM: (2012) .....

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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 cou .....

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ting 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 with ONGC were irrelevant for calculating the existence of an Installation PE since such work did not result in acquiring control over a work site. 11.4 Mr Aggarwal also disputed the finding that ASL was a DAPE of the Assessee in India. He submitted that ASL was an independent entity and carried out substant .....

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and commissioning of platforms in India. Mr Aggarwal further submitted that the comparable companies selected by the DRP for justifying a profit margin of 25% / 28.58% was erroneous as the said alleged comparable companies were engaged in providing engineering services while the Assessee was engaged in construction and installation of pipelines and platforms. He submitted that the alleged comparable companies were functionally different and the ITAT had failed to consider the Assessee s submissi .....

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a sound legal basis. Submissions on behalf of the Revenue 12. Mr Sahni, Senior Standing Counsel appearing for the Revenue controverted the contentions advanced by Mr Aggarwal. He submitted that the Assessee had filed a return admitting that it had a PE in India and in the circumstances, a contrary claim could not be made by the Assessee at the time of the Assessment. He relied upon the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT: (2006) 284 ITR 323 (SC) in support of .....

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uly, 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 i .....

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had been deducted and paid. He also pointed out that, admittedly, the TDS returns had been filed by the Project Office in India. He submitted that in the circumstances, the Assessee s contention that the Project Office in India had only carried on preparatory and auxiliary activities was not sustainable. 12.3 Mr Sahni next referred to the 4WPP Contract which specifically provided that the contractor would be responsible for deployment, transportation, accommodation and catering of all labour, l .....

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terms of the 4WPP Contract which specifically recorded that the notice of award dated 29th November, 2005 would be the effective commencement of this contract. He pointed out that the scope of the work included surveys (pre-engineering, pre-construction/pre-installation and post-installation) and annexure D and E to the 4WPP Contract mentioned the dates and the milestone payments, the same also clearly indicated that activities/works relating to pre-engineering survey/inspection of existing faci .....

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se would begin when the enterprise starts to perform business activities on the spot in connection with the building site or construction or assembly of the project and 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 exist .....

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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 envisaged that the profits attributable to a PE would be determined by the same method year by year; but, the said clause also permitted .....

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ed. He argued that (a) the said instruction was not applicable to the relevant assessment year; (b) the profit margin of 1% was applicable to outside India revenues in cases where the sale took place outside India on FOB basis; and (c) that the said instruction envisaged calculating profit margin at 10% of the gross revenues from operations in India without any deduction. In the circumstances, the DRP had rightly applied Rule 10 of the Income Tax Rules, 1962 to calculate the profits of the Asses .....

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e from activities conducted in relation to design, procurement of material and fabrication of the platforms, was not attributable to the PE in India was erroneous. 12.8 Mr Sahni sought to distinguish the decisions of the Supreme Court in the cases of Ishikawajima-Harima Heavy Industries Ltd. v. DIT: (2007) 288 ITR 408 (SC) and Hyundai Heavy Industries (supra) by contending that whilst the situs of transfer of properties in those cases was outside India; in the present case, possession of the pla .....

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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 .....

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ing more than 9 months within any twelve-month period. 3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include : (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; (c) the maintenance of a stock of goods or .....

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son - 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 enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterpr .....

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nt of independent status within the meaning of this paragraph. 14. Paragraph 1 and paragraph 2 to the extent of sub-paras (a) to (e) of Article 5 of the DTAA are identical to paragraph 1 and 2 of Article 5 of the Model Conventions 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 matte .....

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shment (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 necessarily be satisfied for the existence of a PE. In addition, the word permanent in the te .....

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on , wherein the author had cited the decision in Henriksen v. Grafton Hotel Limited: (1943) 11 ITR (E.C.) 10 (CA) and explained that the expression permanent is relative and not synonymous with everlasting ; the AAR ruled that it was used only in contradistinction to something fleeting, transitory, temporary or casual . 16. Paragraph 2 of Article 5 of the DTAA provides for an inclusive definition of the term Permanent Establishment and specifically lists out places of business that fall within .....

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Article 5, paragraph 2 clearly indicates that it has been used as an explanatory provision to specifically include the species of places of business that would constitute a PE of an enterprise. In this view, paragraph 1 and 2 of Article 5 of the DTAA complement each other. Thus, all classes of PEs as specified in various subparas of paragraph 2 of Article 5 of the DTAA would be construed as a PE subject to the essential conditions of paragraph 1 of Article 5 being met. Insofar as sub-paras (h) a .....

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he 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 o .....

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aph 1 and/or paragraph 2 of Article 5 of the DTAA, yet it would be deemed that a permanent establishment of an enterprise exists if the business of an enterprise is carried on through an agent as described under paragraph 4 of the DTAA. Paragraph 5 of Article 5 provides for an exclusion to the application of paragraph 4 and the agents of a principal enterprise as described in paragraph 5 of the DTAA would be excluded from the scope of paragraph 4 of Article 5 of the DTAA. 19. The controversy whe .....

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5 of the DTAA are satisfied. However, the matter does not rest here; it is next to be seen whether any of the exclusionary clauses of paragraph 3 of Article 5 of the DTAA are applicable. As stated before, Paragraph 3 of Article 5 of the DTAA begins with a non-obstante clause and, thus, the exclusion provided under paragraph 3 of Article 5 of the DTAA would override paragraph 1 and 2 of Article 5 of the DTAA. Thus, even though the Assessee s Project Office established in Mumbai falls within the d .....

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auxiliary character . The Assessee contends that its Project Office falls within this exclusionary clause. 20. It is clear from the plain language of paragraph 1 of Article 5 as well as Article 5(3)(e) of the DTAA that the functions performed at an office maintained by an enterprise would be vital to determine whether the office could be construed to be the PE of that enterprise for the purposes of the DTAA. First of all, the business of an enterprise must be carried on, wholly or partially, thr .....

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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 pl .....

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fice. 22. It is apparent from the plain reading of the aforesaid definitions that whereas a liaison office can act as a channel of communication between the principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity; a project office can play a much wider role. Regulation (6)(ii) of the aforesaid regulations mandates that a project office shall not undertake or carry on any other activity other than the activity relating and incidenta .....

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or opening a project in India was submitted. Clause 3.2.1 of the 4WPP Contract is reproduced below for ready reference:- Pending completion of the whole Works, provisional progressive payments for the part of the Works executed by the Contractor shall be made by Company on the basis of said work completed and certified by the Company s Representative as per the mile stone payment formula provided in the bidding document at Annexure-E of Agreement. Such certification of the Work completed shall b .....

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nk 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 .....

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g information from ONGC or ASL and transmitting the same to the Assessee s office in Abu Dhabi and similarly transmitting communications from Assessee s office in Abu Dhabi to ONGC and ASL. It is claimed that the abovenamed three employees were simple graduates and were not capable for participating in the execution of the work undertaken. The DRP had observed that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni, who were employees of the Project Office of t .....

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.K.G. Nair and Sh. R.L. Kulkarni were employees at the Project Office. 25. In our view, in absence of any material, observations made with regard to the employees of the Project Office being present at the meeting cannot be sustained. Similarly, there is also no material that the employees of the Project Office had participated in review of the engineering documents done in Mumbai or had participated in the discussions or approval of the designs submitted to ONGC. In absence of any material evid .....

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tions as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on Double Taxation Conventions, Third Edition , he states that It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual reali .....

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son 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 (Inter .....

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origin to the Latin word 'auxiliarius' (from auxilium meaning 'help'). The Oxford Dictionary defines the word 'auxiliary' to mean "providing supplementary or additional help and support". In the context of Article 5(3)(e) of the DTAA, the expression would necessarily mean carrying on activities, other than the main business functions, that aid and support the Assessee. In the context of the contracts in question, where the main business is fabrication and instal .....

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the decision in the case of Goetze (India) Ltd. (supra), the Assessee was not entitled to contend that it had no PE in India for several reasons. First and foremost, in the present case, the Assessee's return was not accepted and the AO questioned the attribution of income to the Assessee s PE. In such circumstances, it would be open for the Assessee to point out that its office in India did not carry out any activities to which any income from the project could be attributed. In order to d .....

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sion in the case of Goetze (India) Ltd. (supra) does not fetter the Appellate Authority from considering the claim made by an Assessee. The limitation 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 .....

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lso 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 construction or an assembly project, would commence on the commencement of activities relating to the project or site. The said clause is also to be read harmoniously with parag .....

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ential conditions as stated in paragraph 1 of Article 5 of the DTAA. It is necessary to understand that a building site or a construction assembly project does not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it i .....

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y project. The essence of a PE under Article 5(2)(h) is a building site or a construction or assembly project and the activities of an enterprise relating thereto in the source country. 34. At this stage, it would also be relevant to refer to the following extract from the commentary by Klaus Vogel on Double Taxation Conventions, Third Edition :- the minimum period begins when the enterprise starts to perform business activities on the spot in connection with a building site or construction or a .....

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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 .....

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s also involved alongwith the sub-contractor. 37. In the present case, the Assessee claims that the survey was conducted by an independent third party engaged by the Assessee and that too for a period of 9 days in one instance and 27 days in another (from 27.02.2006 to 07.03.2006 and 25.04.2006 to 21.05.2006). The Assessee commenced its activities at site when the barges entered into the Indian territory on 19.11.2006 and such activities relating to the installation, testing and commissioning of .....

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the commencement of initial activities of pre-engineering survey and the commencement of installation works. The issue to be addressed is whether such interruptions should be excluded from the minimum duration period. An interruption in the normal course of activities such as weekly day off would undoubtedly be included in the duration of the PE but in cases where interruption exceeds substantial periods which represent cessation of the activities at site, it would be difficult to accept that t .....

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supra m.no.1, at 390). 39. In the facts of the present case, where admittedly the Assessee did not have access to the site during the period from 21.05.2006 till 19.11.2006, the same clearly cannot be construed as its PE under Article 5(2)(h) of DTAA. If the period during which the Assessee did not 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 expressi .....

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s 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 activity co .....

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months. The Assessee s Project Office is inextricably linked to the project. Therefore, if the duration of the project activities in India was less than nine months, it cannot be held that the Assessee had a PE in India under Article 5(2)(h) of the DTAA. 42. In view of the above, answer to the second question is in the negative, that is, in favour of the Assessee and against the Revenue. 43. The next issue to be addressed is whether ASL could be construed as a DAPE of the Assessee within the me .....

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Ship Owning/Chartering, Barge Owning, Lighterage, Transportation, Offshore Marketing/Technical Consultancy and Offshore Fabrication and Installation work. The Company provides all logistic and consultancy support to NPCC, Abu Dhabi, Valentine Maritime (Gulf) LLC, Abu Dhabi and Valentine Maritime (Mauritius) Ltd., Mauritius and other Indian Companies for their various Offshore Contracts towards Construction of Oil & Gas production/process Platforms and Pipelines at Mumbai High for ONGC & .....

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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 Ser .....

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ee. The Director s Report also clearly indicates that the activity of providing offshore marketing/technical consultancy and offshore fabrication and installation work were amongst the regular activities carried on by ASL. 45. The Assessee has also placed on record a copy of the consultancy agreement dated 26th December, 1994 entered into with ASL. Clause 1, 2 & 3 are relevant and are quoted below:- Clause 1 The Consultant hereby agree to act as the sole and exclusive Consultant for the Prin .....

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#39;s activities in India. (c) Assistance in obtaining services and facilities in India. 46. It is clear from the above that ASL had agreed to act as a sole and exclusive consultant for the Assessee in India and had further agreed not to represent any competitor of the Assessee or act in a manner detrimental to the Assessee s interest. The recital to the agreement also indicates that the Assessee was desirous to undertake offshore contract work in India and had, therefore, appointed ASL as its s .....

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ble. There was no material which would justify this conclusion. The consultancy agreement clearly indicates that ASL was engaged to (a) provide assistance in gathering relevant market information; (b) assistance in obtaining works; (c) active representation and promotion of the Assessee s activities in India; and (d) provide assistance in obtaining services and facilities in India. Clause 2 of the consultancy agreement clearly indicates that the contracts would be tendered for and executed by th .....

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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 ha .....

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provided that such person are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. 49. A plain reading of paragraph 4 of Article 5 indicates that for a person to constitute a DAPE, the agent must (a) not be an agent of independent status to whom paragraph 5 applies; (b) the agent acts on beha .....

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ts outside its ordinary course of business would fall outside the scope of paragraph 5 of Article 5 of the DTAA. Therefore, in order to consider whether an agent of an enterprise falls within the ambit of paragraph 5 of Article 5 of the DTAA, it is necessary to consider whether (a) the agent is one of an independent status and (b) whether he is acting on behalf of the enterprise in the ordinary course of its business. Applying the aforesaid tests in the facts of the present case, it is at once c .....

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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. Althou .....

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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 ITAT has erroneously held that the Assessee has a PE in India. Although the ITAT has held so, it has not quantified the income attributable to the PE. Thus, the answer to question no.4 framed in the Assessee s appeal is answered in favour of the Assessee and against the Revenue. 54. Insofar as the question whether .....

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the CBDT Instruction No.1767 provided the legal basis for the method of computation of taxable income adopted by the Assessee, the same is clearly erroneous. Section 44BB of the Act provides for levying tax on a presumptive basis and 10% of the receipts are presumed to be the profits of a foreign company rendering the services specified therein. There is no scope for allowing any deduction while computing tax on a presumptive basis. The method of computation as adopted by the Assessee is also no .....

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oes not have a PE in India in terms of the DTAA, thus, the question of splitting the business profits of the Assessee arising from the contract into profits attributable to India and profits attributable to the Assessee overseas does not arise. In this view, it is not necessary to address the questions raised by the Revenue. However, for the sake of completeness, we consider it appropriate to address the said question on an assumption that the Assessee did have a PE in India during the relevant .....

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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 f .....

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elevant and are reproduced as under:- "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), wh .....

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determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State." 59. It is apparent from the plain reading of the above qu .....

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, a method is to be found out to ascertain the profits arising in India and the only way to do so is by treating the Indian permanent establishment as a separate 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 establishme .....

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essee 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) specifically assigns value to various activities. It is also not disputed that the invoices raised by the Assessee specifically mentioned the work done outsid .....

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