TMI Blog2009 (6) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Mr. Justice P. V. Reddi (Chairman), Mr. A. Sinha (Member) and Mr. Rao Ranvijay Singh (Member) Present for the Department Mr. S. B. Chakaraborthy, ITO (Intl. Taxation)-1(2), Chennai Present for the Applicant Mr. P. J. Pardiwalla, Sr. Advocate, Mr. R. Murlidhar, Advocate RULING [By Hon'ble Chairman] - The applicant is a Company incorporated in Mauritius. The following facts are stated in the application seeking advance ruling under Section 245Q(1) of the Income tax Act, 1961 and the written submissions. 1.1. The applicant entered into an agreement on 4th December 2007 with Hindustan Oil Exploration Company Ltd. (hereafter referred to as "HOEC"), an Indian company for laying pipelines under the sea and constructing the structures inclusive of pre-commissioning of the pipelines for a fixed and lumpsum consideration of USD 59,174,200/-. HOEC wants to set up gas processing facility at PY-1 gas field located in the northern off-shore portion of the Kaveri basin (in the State of Tamil Nadu). Accordingly, HOEC has given the contract to the applicant to carry out the work of laying pipelines under the sea. The work consists of transportation and installation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Installation of Pipeline; (12) Completion of Jacket and deck installation; (13) Completion of testing of trap-to-trap Pipeline and Riser system; (14) Demobilisation of DLB Spread from Site; (15) Submission of As-Built Documentation. 1.3. The applicant has categorized the above activities into those which will be performed wholly outside India and those which will be carried out in India. The activities listed at 1-8, 10 and 15 which relate to planning, follow-on engineering, mobilization and rig-up of equipment etc. will be performed wholly outside India, according to the applicant. The other activities listed at sl. nos. 9 to 11 and 14 will be executed within India. As far as item 6 to 8 and 10 are concerned, it is stated that 'most of the activity' will be outside India. 1% of the payment will be received by the applicant on submission of the plans mentioned in item 2, the actual date of which is given as 25th July, 2008. The next payments start from the completion of importation and arrival of the dredging spread at site (item 6) which took place on 24th November, 2008. The major part of the payment i.e, 29% and 10% will be received by the applicant on completion of inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs ("TSHD") which the sub-contractor has imported from Holland/Singapore. This activity referred to at Sr.No.6 of the milestone description has commenced on 8th January 2009 and is expected to be completed on 8 March 2009. d. The assembly of the pipelines as well as of the Jacket and Deck will be done by the Derrick Lay Barge (DLB). The DLB has welding stations where parts of the pipes will be welded and assembled to form a long pipeline. Subsequent to welding and assembling, the DLB will move forward so that the welded pipe slides over from the DLB to the sea. This process of welding the parts and DLB moving forward will continue till the entire pipe line is welded together and laid down in the sea. The assembling and laying of the pipeline will be from the shore on the east coast of India to PY-1 oil field. The DLB, not being self-propelled, moves with the help of tugs and anchors and its action is similar to the movement of a spider. The DLB will also launch, erect and pile drive the Jacket, Deck and accessories apart from assembly and laying of the pipelines into the sea bed. The clearance to the DLB to enter Indian waters was granted on 9 February 2009 and the DLB has move ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Construction (Mauritius) Limited are covered within the scope of the provisions of section 44BB of the Income Tax Act and whether Cal Dive Marine Construction (Mauritius) Limited can pay presumptive tax on the amount attributable to the operations carried out in India as prescribed under section 44BB of the Income Tax Act? 4. If the answer to (1) is in the affirmative and based on the response to questions above, whether tax at the rate of 4.223% can be withheld at source on the lumpsum contract price attributable to the operations carried out in India? 4. The first question that arises is whether the work undertaken by the applicant under the contract can be said to be construction or assembly project and if so, whether it should necessarily continue for a period of more than 9 months in order to constitute 'permanent establishment' within the meaning of Art.5. It incidentally raises the question whether the project of the applicant can be brought within the purview of para 1 of Art.5 without reference to and without being trammelled by the test of duration laid down by clause I of Art.5.2. 5. For the purpose of deciding the contentious issue, let us analyze Artcile 5. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms to be this. Paragraph 1 sets out a general definition; paragraph 2 gives an inclusive definition; paragraph 3 prescribes a limitation; paragraph 4 out-lines a number of exclusions and paragraphs 5 to 7 deal with special cases where the foreign enterprise functions not directly but through some other agency in the relevant territory. For the purposes of the present applications, paragraphs 4 to 7 are not relevant. Confining one's attention to paragraphs 1 to 3, one notices that, while the general definition and clauses (a) to (h) of the inclusive definition make no reference to any minimum period for which the permanent establishment should be in existence within the State, clause (i) of paragraph 2 does. A qualification with reference to time is also found in paragraph 3. " "3. A building site or construction or installation project, or an installation or drilling rig or ship used for the exploration or exploitation of natural resources, constitutes a permanent establishment only if it lasts more than twelve months." 5.3. Para 3 of Article 5 of the India-Netherlands Treaty referred to in that case corresponds to clause (i) of Article 5(2) of the Treaty with which we are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 6.2. Now, we must consider the more controversial aspect as regards the interplay of paragraph 1 and clause (i) of para 2 of Art.5. The question is whether paragraph 1 of Art.5 can be viewed on stand-alone basis without regard to clause (i) of para 2? If the project office and/or the Barge from which the applicant carries out its operations can be treated as a fixed place of business within the meaning of Art.5.1, is it still necessary that the business from such a fixed place should be carried on for a period of more than 9 months? These are the questions that should engage our attention. The argument in support of the contention that the minimum period of 9 months should not be imported into para 1 may be buttressed by the fact that para 2 purports to be an inclusive definition. An inclusive definition, normally speaking, will only expand rather than restrict the meaning and amplitude of the preceding general expression or term. In other words, it may be argued that the amplitude of para 1 cannot be cut-down by referring to the terminology of para 2. But, in our view, having regard to the contextual setting of the two paragraphs of Article 5, too much of emphasis cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled that a strict and literal construction should be avoided in interpreting a clause in the Treaty and the intention and purpose behind the provisions incorporated in the Treaty should be given due weight. As discussed earlier, the fact that clause (i) of para 2 is a part of inclusive definition whereas para 1 is the primary and main definition of PE does not mean that these two paras should be read distinctly, independent of each other. We reiterate that these two paras should be read harmoniously as part of the same concept. In relation to a building site and construction/assembly project, the prescribed minimum period should be read into the expression 'fixed place of business' occurring in para 1. As clarified earlier, it is implicit in the very concept of PE and the expression 'fixed place of business' that it should be in existence for a fairly long time and merely carrying on some activities intermittently or for a short while do not impress the place with the character of a fixed place through which the business of the enterprise is carried on. That being so, when clause (i) of para 2 sets out a minimum period for the continuance of the construction or installation proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depend on the individual facts of each case." The Authority was of the view that "the period of operations in the contracts under consideration, taken separately or even together were too short and insignificant to justify the attribution of an element of fixity to the said places of business." 7.3. Another case in which the same view was taken is the ruling in Brown Root Inc. vs. CIT3. Rejecting the contention of the Revenue that the installation of gas pipeline falls within the scope of other clauses of Article 5 such as clause (a), (which speaks of 'place of management'), it was observed that "such plea would militate against the well established principles that a specific provision will override a general one and that the assessee/subject is entitled to invoke the provision most beneficial to him be they the provisions of a Treaty or Statute." "Since the activity falls short of 120 days, the applicant could not be said to have a PE in India. The element of permanence in relation to an establishment, if any, would be attracted under Article 5(2)(k) only if the installation project continues for a period of more than 120 days and that condition is not satisfied here." 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages leading to the actual commencement of the work such as gathering the equipment and arranging the infrastructure for carrying out the work in full swing can legitimately fall within the ambit of the project duration. In this context, we may refer to the pertinent observations made and the opinion expressed by Mr. Arvid A. Skaar in the Chapter on Permanent Establishment. "The specific problems arising from the "permanence test" for construction tasks deal partly with computing the length of the "duration test," i.e. the start and end of the "duration test," and the impact of interruptions. A decisive factor regarding the working period is the factual working time, including on-site planning. This applies regardless of whether or not the work has started before the contract was signed by both parties, or whether the activity is preparatory with respect to what is considered "construction work" under the construction clause. The problem is thus to decide when a construction or installation task actually starts. Some older tax-treaty commentators have held that the "12-month test" starts to run when the actual construction begins. In pre-1977 regulations, US tax authorities have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en intermittent visits by the Project Management Team (PMT) to discuss the planning and contract issues with HOEC. The duration of each trip was 2-4 days. As regards the activity listed at 6 above, 6-8 members of Project Management Team (PMT) arrived in India in January and February 2009 and co-ordinated with the agent appointed by CDMC in India for the purpose of interalia, obtaining permits, clearances and making other relevant applications to Indian Authorities. The agent commenced its logistic services to CDMA in September 2008. Also, in early mid-November and December 2008, additional members of PMT team arrived in India to monitor the shore approach activities and prepare for pipe load out. Pre-construction survey was undertaken on 13th November 2008 before preparing the engineering analysis plan which merely involved ascertaining whether the pipeline route was clear of any debris and obstruction. Pre-construction survey merely enabled the Applicant to determine an anchor drop pattern while laying the pipe and installation of Jacket and Deck. 9.1. The pre-construction survey in November, 2008 and the arrival of members of PMT in mid-November 2008 to monitor the shore a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract is the material date for computing the 9 months period. The project commencement cannot in the absence of any definite indicia be equated to be contract signing date. For instance, in clause 12.1.1. it is stipulated that within 90 days of the effective date, the contractor shall submit for approval by the company, a detailed programme of work. Thus, even preparation of the programme of work will be 90 days after the effective date. It would be absurd to say that even before such programme of work schedule is drawn up, the project commences. In any case, the preliminary work performed by the applicant outside India (item 1 to 5 of milestone description) cannot be taken into account for the purpose of identifying the starting point of time of 9 months. Thus, the starting point cannot be earlier than October, 2008 as contended by the applicant. The project, according to the dates furnished by the applicant in February, 2009, was expected to be completed in all respects by March, 2009. 10. We are, therefore, of the view that the applicant cannot be said to have permanent establishment within the meaning of para 1 of Article 5 read with clause (i) of Article 5.2 of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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