TMI Blog1996 (10) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... Korean company, in its turn, entered into sub-contracts with an Indian company, and B in respect of some of the items of work to be performed by it under the main contract. The sub-contract with the Indian company is dated February 17, 1995, and that with B is dated December 15, 1995. The Indian company, however, entered into a further sub-contract with H on February 22, 1995. The two applicants here are thus sub-contractors executing portions of the work entrusted originally by the Indian public sector corporation to the Korean company. It is of some interest to note that while H appears to be an old established company registered as long ago as March 9, 1987, B is a new-comer registered as late as December 14, 1995, just one day prior to its entering into the subcontract with the Korean company. The sub-contracts related to pipelines under the sea for the said project. The activities to be carried out by the sub-contractors are set out in appendix-A to the contract. It is unnecessary to set out the details elaborately here. Briefly, the scope of the work under the sub-contracts can be described thus : (i) H : H was responsible for carrying out the following work : Performi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income under the said contracts can be said to arise in India as they arise from activities carried out in Indian territory, they cannot be taxed in respect of such income because of the provisions of the DTAA read with section 90(2) of the Act. Reliance is placed on a Circular No. 333 (see [1982] 137 ITR (St.) 1 ), dated April 2, 1982, of the Central Board of Direct Taxes and the decision of the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, for the proposition that the specific provisions of the DTAA will prevail over the general provisions of the Act. The applicants point out that the contracts are being carried out by them as part of their regular business activities and the income derived from these activities is in the nature of income from business. Article 7 of the DTAA regulates the taxability of income from business carried on by a resident of one of the States in the other. It reads, in so far as relevant here, thus : (see [1989] 177 ITR (St.) 72, 78). Article 7-Business profits : 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contradistinction to something fleeting, transitory, temporary or casual. The context in which the expression is used amply makes this clear. The language of paragraph 2 [in particular of clause (i)] and that of paragraph 3 of article 5 also indicates that the duration of the establishment need not be for years and may even be of months only. The words permanent and establishment , when read with the language of paragraph 1 of article 5, connote the existence of a substantial element of an enduring or permanent nature which can be attributed to a fixed place of business in that country but the issue whether the nexus can be said to be substantial or enduring would depend entirely on the facts and circumstances of each case. The expression fixed place of business through which business of an enterprise is partly or wholly carried on is wide enough to take in any place at, in or through which any or all of the business activities of the enterprise are carried on. We generally talk of a place at which, or in which, a business is carried on. By using the expression through , the paragraph connotes nothing different ; that word is used only to be consistent with the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the applicant , attention was not focussed on the fact that the operations of the applicants were through a ship stationed in territorial waters. After observing that (page 59) : since the applicant was only engaged in the burial of pipelines, therefore, it cannot be said that there was any fixed place through which its business was carried on , the authority moved on to consider clauses (f) and (g) of paragraph 2 and paragraph 3 of article 5 of the DTAA. In all fairness, it cannot be said, that the authority directed its attention to the question whether the deployment of a vessel which constituted the base for the underwater operations could itself be considered as a fixed place of business of the applicant. The authority is of the view that a consideration of this aspect is called for here. In the authority s opinion, there is no reason why the diving support vessel cannot be considered to be a fixed place of business of the applicants. A place , says Klaus Vogel at page 205 of his Double Taxation Conventions , though normally a particular portion of space, must be read here in the light of its being used to define establishment . A place of business , therefore, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business in the territory concerned. That does not seem to be the intention of describing a permanent establishment to include a fixed place of business. Klaus Vogel says that the requirement that the place of business should be a fixed one postulates a link between the place of business and a specific geographical point. This would seem to be too narrow and restricted. The expression place refers to a portion of space , as mentioned earlier, and it will be more appropriate to think of a fixed place of business as postulating a link between the place of business and a definite geographical area or location ; it would comprehend an area or range of functioning much wider than a dimension less point in space. The diving offshore vessel, in the case of the present applicants, located and functioning within a defined area, can well be described, in the authority s view, as a fixed place of business from which they are carrying out their business transactions. The above conclusion, however, is not sufficient to dispose of the present applications. In order to decide whether a foreign enterprise has a permanent establishment or not, the paragraphs of article 5 which define t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinuance is fulfilled. Unfortunately, the wording of the paragraph is ambiguous and cannot be precisely correlated to one or other of the items mentioned in paragraphs 1 and 2. It refers to a site or project -words which are not used in either of the preceding paragarphs. It is not relevant for the purpose of the present case to examine the precise scope of this paragraph but it is sufficient to say that, under it, a construction, installation or assembly project cannot be treated as a permanent establishment, unless it continues for a period of more than six months, even though it might otherwise fulfil the definition contained in paragraph 1 or 2. The present applicants, as in Advance Ruling A. No. P-11 of 1995, In re [1997] 228 ITR 55 (AAR), are engaged in an installation or assembly project. It is true that they are not installing the pipelines for the first time and are only working at the laterals on those installations but their work can be described as an installation project as they are engaged in a project of rectifying or supplementing installations of pipelines. This being so, the applicants can be considered to have a permanent establishment in India only if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the period of operations in the contracts under consideration-taken separately or even together-are too short and insignificant to justify the attribution of an element of fixity to the said places of business. In either view of the matter, the authority is of the view that the applicants cannot be said to have had any permanent establishments in India and that they are not taxable on the income received by them under the sub-contracts under consideration. Accordingly, the authority pronounces the following : In light of the relevant facts as mentioned in annexure-2 and the applicants interpreta tion of law and facts as mentioned in annex ure-3, whether income derived by H from its contract dated February 22, 1995, with the Indian company, is taxable in India ? No. The taxability [in terms of article 5 of the Agreement for Avoidance of Double Taxation concluded between India and Netherlands] of revenues earned by B, a tax resident of the Netherlands, from the contract entered into with the company incorporated and existing under the laws of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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