TMI Blog2009 (9) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... Ms. Nandita Kanchan, Addl. DIT(Int. Tax) New Delhi. RULING [By Hon'ble Chairman] - In this application for advance ruling by a non-resident company, the ruling is sought on the following questions: i. Whether looking to the nature of activities to be carried on by the applicant, which is a German based company and non-resident as per the provisions of Section 6(3) of the Income-tax Act, 1961, the applicant can be held to have earned any income taxable in India as per the provisions of the Income-tax Act, 1961? ii. If the answer is affirmative, how the total income of the applicant as per the provisions of the Income-tax Act, 1961 should be computed? 2. The following are the facts stated in the application and the affidavit filed subsequently : The applicant is a company incorporated in Germany having its registered office in Dinslaken, Germany. Through the process of international bidding, the applicant was awarded a contract by M/s. Tuticorin Port Trust (hereinafter referred to as "TPT") on 28th November, 2006. The scope of work is "work design, fabrication supply, transportation, delivery, installation and maintenance of mild steel, navigational channel an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantities and the terms of payment and the maintenance period are all given in the work order. The bill of quantities mentions 22 items. Soon thereafter, the applicant placed purchase order (supplement) on its sub-contractor. Under the general conditions of the contract, sub-contracting is not permitted without written permission of the concerned Engineer of TPT. The sub-contract was permitted by TPT vide its communication dated 18th June, 2009. In that letter there is an express stipulation that sub-contracting does not exonerate the main contractor (the applicant) from liabilities under the Contract. In the purchase order issued to Asia Navigation Aids (ANA), the same 22 items set out in the main contract are also set out. The applicant stated in the affidavit dated 12.2.2009 that items 4 to 9 (a) of the purchase order were deleted and the applicant appointed M/s. Chain (P) Limited, Kolkata, for the mooring chain and accessories and another concern by name Technocrafts, Faridabad, for supply of sinkers as sub-contractors in place of ANA. A copy of the Purchase Order supplement dated 20.12.2006 issued to ANA has been filed. 2.2. The payment schedule is set out in detail in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxed in the other State but only so much of them as is attributable to that permanent establishment. Thus, the business profit can be taxed in India only if the applicant carries on business through the PE situated in India. In case, PE exists, only so much of the profits as are attributable to the operations of the PE are liable to be taxed. The above provision in the Treaty gives primacy to the resident State to tax the profits. The rationale of this provision is explained thus in the OECD Commentary on Article 7 of the Model Convention (2008 Publication): "it has come to be accepted in international fiscal matters until an enterprise of one State sets up a permanent establishment in another State it should not properly be regarded as participating in the economic life of that other State to such an extent that it comes within the jurisdiction of that other States taxing rights." 6. As already noted, it is the contention of the applicant that there is no PE in India and no PE can be deemed to exist under Article 5. Article 5 defines the PE. The relevant part thereof is extracted below: Article 5: Permanent Establishment: 1. For the purposes of this Agreement, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Article 5 and clause (i) of para 2 of Article 5 was explained by this Authority in a recent case - Cal Dive Marine Construction ( Mauritius ) Ltd. 315 ITR 334. The following passages in that ruling are relevant: "6.1. Once clause (i) is attracted, the minimum period test will have to be necessarily applied. The fact that the applicant may have a project office or a workshop for the purpose of carrying out the contractual work does not bring the establishment of the applicant within the other clauses of para 2 to the exclusion of clause (i). On the other hand, clause (i) being a specific provision dealing with construction or assembly project, that provision prevails over the other clauses of para 2 of Art.5 which are general in nature. In other words, an office or workshop, if it is established as a part of or incidental to the execution of a construction or assembly project, it is clause (i) alone that comes into play. That is the only way to reconcile and avoid conflict between overlapping items/expressions contained in para 2 of Art.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 Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith construction or assembly project, the minimum duration was advisedly prescribed by the signatories to the Treaty. Such minimum period is specified in all the Treaties without exception, though the length of period widely varies in various Treaties. If the opening para of Art.5 is to be read on stand-alone basis, then clause (i) of para 2 will be rendered ineffectual and perhaps otiose. Such construction should be avoided especially while reading and understanding a Treaty provision. It is well-settled 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' oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression "Permanent Establishment" was construed in more or less similar manner. The learned judges observed that PE connotes "a virtual projection of the foreign enterprise into the soil of another country". In that case, Jagannatha Rao J. speaking for the Division Bench of the High Court, rejected the contention that the German Company to whom the contract was awarded by the Port Trust would fall under clause (bb) of Article II(1) of the Indo-German Treaty. Clause (bb) which is part of the definition of PE laid down that an enterprise of one of the territories shall be deemed to have a fixed place of business in the other territory if it carries on in that other territory a construction, installation or assembly project or the like …………..". The contention of the Revenue was that the German company carried out the work of construction, installation, etc. through its agent i.e. a Poona based company which was given a sub-contract for fabrication of certain items in India and that the German company must, therefore, be deemed to have a PE through such agent in India. The contention was repelled thus: "This submission is based on an assumption that the word "it" in cl.(bb) can be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was an independent sub-contractor of the German company cannot be attributed to the Germany company so as to attract the provisions of clause (bb) of Article II(1)((i) of the Indo-German Treaty as it then stood. 11. In order to support the contention that the sub-contractor's work place can be treated as the PE of the applicant, the Commissioner has relied on paragraph 19 of the OECD Commentary on Article 5 (See Model Tax Convention Income and Capital (Condensed version), 2008 Publication). "If an enterprise (general contractor) which has taken the performance of a comprehensive project subcontracts parts of such a project to other enterprises (sub-contractors), the period spent by a sub-contractor working on the building site must be considered as being time spent by the general contractor on the building project. The sub-contractor himself has a PE at the site if his activities there last more than 12 months." 11.1. The context in which the passage occurs is important. The said passage, as I understand it,covers a situation where a building site has been set up by the main contractor and the services of the sub-contractor are also deployed in aiding the execution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt's personnel making use of the same with frequency and regularity. Occasional or brief visits by some of the employees of the applicant right from the beginning does not give rise to inference of the existence of PE. Taking an overall view, it appears the need for setting up the PE would arise sometime before the installation and commissioning operations begin. For instance, as per the terms of payments stipulated in the Tender document, the chain pendants for channel and fairway buoys, channel buoy lights solar panel and batteries are to be made available at the Contractor's yard for the purpose of claiming 6th and 7th installments and the 8th installment is payable on arrival of all channel and Fairway buoys with accessories at Sethu Samudram Ship Channel. It pre-supposes a yard being set up near the channel site. If at all, it is at that stage or perhaps from the stage of transportation of buoys etc. that the starting point of six month period would set in but not earlier. Even then, going by the applicant's version which accords with probabilities, the duration of the applicant's activities at the site/yard as well as the supervisory activities at the stage of installation an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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