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TMI Blog2021 (7) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... Avoidance Agreement between India and the UAE.. 3. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding the assessee did not have a Installation Permanent Establishment under article 5(2)(h) of the Double Avoidance Agreement between India and the UAE.. 4. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding that M/s Arcadia Shipping Ltd was not a Dependent Agent Pernament Establishment of the assessee were 'preparatory and auxiliary' in nature in terms of the Article 5(4) of the Double Avoidance Agreement between India and the UAE. 5. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding taht no income of the assessee can be attributed to the assessee's Permanent Establishment in india. 6. Whether on the facts and in the circumstances of the case, the CIT(A) erred in holding that profit attributable to the assessee's PE at 2.81% of its offshore segment and 16.98% of its onshore service segment, were not tabable in India. 7. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal. 3. Briefly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 2) Whether the order of the I ncome Tax Appellate Tribunal violates and is contrary to Article 7 (6) of the Double Taxation Avoidance Agreement between India and UAE. 7. And the Hon'ble High Court adjudicated the quarrel as under :- Reasoning and Conclusion 13. The first three questions framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013) relate to the existence of an Assessee's PE in India in terms of Article 5 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons 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 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... graph 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) and (i) of paragraph 2 of Article 5 are concerned, the test of permanence as required under paragraph 1 of Article 5 is substituted by a specified minimum period of nine months. Thus, places of business as specified under sub-paras (h) and (i) of paragraph 2 of Article 5, cannot be construed as a PE of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and paragraph 2 of Article 5, a PE would not include "maintenance of a fixed place of business solely for the purposes of carrying on, for the enterprise any other activity of a preparatory or 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one payment formula provided in the bidding document at Annexure-E of Agreement. Such certification of the Work completed shall be made by the Company's Representative within 15 days of receipt of Contractor's Application for Certification with all required supporting documents. No payments shall become due and payable to the Contractor until Contract is signed by the two parties and Contractor furnishes to the Company Performance Guarantee (as per Clause 3.3) and Certificate of insurance for Policy/Policies specific for the project and other policies (as per requirement 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 Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Conventions framed by OECD, United Nations 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 realisation of profits that it is 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 chequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was necessary to examine the role played by the Assessee's Project Office and its involvement with the activities to be conducted under the contracts. In view of the nature of the enquiry, it would always be open for the Assessee to explain that the Project Office was only involved as a communication channel and was not involved in any of the main activities required for execution of the contracts. Secondly, the decision 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)(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 assembly project. The term 'on the spot' should, in these instances, not necessarily be taken to denote the actual place where the building works, etc., are to be accomplished, for instance, in cases where a planning office 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 durat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow:- "Long interruptions lead to a suspension of the minimum time period if the continuation of the work is functionally related with the work performed prior to the interruption (see Schieber, P.-H., supra m.no.1, at 268; in contrast Skaar, A., 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies for their various Offshore Contracts towards Construction of Oil & Gas production/process Platforms and Pipelines at Mumbai High for ONGC & other Indian/Foreign Companies. The company is qualified to bid as approved Offshore Project Contractor for ONGC, MDL, L&T, EIL, HHI, etc. The Company also continued to provide logistic, technical and marketing support to M/s. Winco Maritime Ltd., London in Technical & Commercial Management of their cargo vessels in worldwide trading and also in Indian Coastal Traffic. 3) OFFSHORE 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ASL was working 'wholly and exclusively' for the Assessee, is clearly not sustainable. 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 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that ASL has acted on behalf of the Assessee in its normal course of business. This is evident from the Director's Report which indicates that regular activities of ASL include offshore marketing/technical consultancy and ASL in its regular course of business provides logistics and consultancy support to various entities including the Assessee. It is also apparent from the final accounts of ASL for the year 2006-07 that it carries on substantial business other than the services provided 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 period. 57. Section 4 of the Act is a charging section by virtue of which 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly way to ascertain the profits arising in India would be by treating the Assessee's permanent establishment in India as a separate profit centre viz-a-viz the foreign enterprise. The Court held as under:- "The Indian Income-tax Act, 1961 is concerned only with the profits earned in India and, therefore, 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 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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