TMI Blog2010 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... a PE under the general rule of art. 5(1), it will be outside the ambit of definition of PE by the virtue of art. 5(2)(i). Therefore, when definition clause specifically provides for aggregation of time spent on various sites, projects or activities, the sum total of the time spent on such sites, projects or activities, except for parallel counting of days, is to be taken into account for applying the threshold time-limit. However, when aggregation is not specifically provided for in the relevant PE definition clause, as in the present case, normally it cannot be open to us to infer the application of aggregation principle. We are in considered agreement with this analysis and approach of the OECD Commentary which has also been, as we have noted earlier, adopted by the UN Commentary as well. However, there are two important issues that we need to deal with at this stage-first, as to who has the onus to show that the contracts are artificially split, or otherwise the affairs are so arranged, so as to circumvent the duration test; and-second, what are the circumstances in which the aggregation principle is to be applied, even in the absence of specific provisions to that effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that this work was carried out in the same oilfield, which is a huge geographical area anyway, is sufficient to invoke that exercise. Even if these projects are commercially coherent in the sense that these projects are for the same principal, and geographically coherent in the sense that these are on nearby locations, these two factors would not necessarily mean that these projects are to be necessarily seen as a coherent whole geographically and commercially. AO has given a finding that, even on standalone basis, one of the contracts exceeds the threshold limit. It is pointed out that so far as Contract No. 95/C/04 (D-4522) is concerned, the actual contract period is concerned the same is nineteen months since the first invoice was raised on 1st Nov., 1996 and the last invoice was raised on 4th May, 1998. It is, however, noted that the commencement date, as per the contract, was 1st Nov., 1996 and the completion date of the contract was specified as 31st May, 1997. In appeal, the assessee had pointed out to the CIT(A) the invoices in question were for mobilization advance (invoice dt. 1st Nov., 1996) and for sail out of the Derrick Barge from outside India (invoice dt. 4th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dt. 30th March, 2004, for the asst. yr. 1997-98, on the following grounds: "1. The learned CIT(A) erred in upholding the action of the AO in charging to tax receipts from all the contracts on the ground that the appellant had a PE in India, ignoring the fact that the duration of work performed under each of the contract did not exceed nine months as per India-Mauritius tax treaty. 2. The learned CIT(A) ought to have held that no income could be attributed to the PE. 3. The learned CIT(A) ought to have held that no income could be attributed to the PE may be taxed in India." 2. The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a Mauritius based company and is engaged in the business of installation of offshore platforms, decks, pipelines, jackets and various other similar activities, for the purpose of mineral oil exploration. During the relevant financial period, the assessee was engaged in executing certain installation contracts in Tapti and Panna offshore fields in the Indian continental shelf. However, according to the assessee, the income so earned by the assessee was not liable to be taxed in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws: The contract duration shall be two months from the commencement date plus any time extension approved by Enron Commencement date shall be on or about 16th March, 1996 Completion date is as specified in Exh. "H". Contract No. 95/C/04 (D-4522) Duration of contract The term and duration of this agreement is based upon the following stipulations. Commencement date 1st Nov., 1996 Completion date is as specified in 31st May, 1997 In view of the duration clause of the contracts and completion certificates issued by the EOGI Ltd. It is apparently clear that the work in Panna field was executed from March, 1996 to May, 1997. The assessee has deliberately given wrong dates of duration of work in both the returns of income and in reply dt. 15th March, 2000. Invoices have also been collected under s. 133(6). The last invoice for Panna field is raised on 4th May, 1992 (sic-4th May, 1998) (invoice No. 4522607/LO) and first invoice was raised on 1st Nov., 1996 (invoice No. 4522001/LO) under contract No. D-4522. The invoices are raised in 19 months under this contract. In view of the above facts, it is clear that the assessee's work in Panna field has exceeded the period for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etion date as 31st May, 1997. However, in actual fact the work at the site commenced only on 5th Feb., 1997 and was completed on 19th May, 1997. - At all completion dates are based on the contract completion certificate issued by the contractor and were produced to the Jt. Director of IT. - No work was carried on in the Panna field (contract D-4522) during the period December, 1996 to January, 1997. Work on contract D-4522 did not commence until 5th Feb., 1997. Therefore, it cannot be said that the work was carried out on the Panna field continuously from March, 1996 to May, 1997 as claimed by the Jt. CIT. - The appellant has retrieved the activity reports from its archives. Copies of relevant reports are attached to support the appellant's submission on the physical presence of equipment and personnel of India. 2. It is pointed out that each of the contracts entered into by our clients with various parties are independent contracts and are not related to each other. Each of the contracts continued for specific duration only. It is further contended that each of these contracts, D-4406 and D-4522 was bid negotiated and awarded separately. The work scope of each contract is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mobilization of the personnel and the vessels after the execution and winding up activities without any evidence on record. He has held so merely on suspicion, surmise and conjecture. 6. It is submitted that under the Indo-Mauritius tax treaty, a building site or construction or assembly project or supervisory activities in connection therewith shall be regarded as a PE where such site, project or supervisory activities continue for a period of more than nine months. In computing the period of nine months each site, project or supervisory activity is to be taken separately and the test of nine months has to be applied to each particular activity separately. The various periods during which the work was carried in India under various contracts at various periods during which the work was carried out in India under various contracts at various locations cannot be aggregated to determine whether your appellant carried out the work in India for a period of more than nine months. 7. Moreover, the period of nine months has to be computed with reference to the number of days the activity was carried out in India. In computing the period of nine months, the work, if any, done outside I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of transportation and installation of platform and facilities for the Tapti and Panna fields, offshore India. So the nature of job for all the contracts and the geographical location is also same. If we see the duration of work, it is clear that the work was carried out continuously for March, 1996 to May, 1997, of course, there was negligible interruption but, there is no overlapping of months or dates. 4.17 Under art. 5 of the India-Mauritius tax treaty, a building site or construction or assembly project or supervisory activities in connection therewith shall be regarded as a PE where such site, project or supervisory activities continue for a period of more than nine months. In view of the above facts the appellant's contention that the periods during which work was carried out in India under various contracts cannot be aggregated for determination of PE because all three contracts are commercially separate is not acceptable. In this respect para 18 of the commentary on OECD model treaty is relevant wherein it has been observed that a "building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vention which is more of an agreed extension of PE definition rather than being illustrative in nature. The relevant extracts from art. 5 of India-Mauritius tax treaty are as follows: "Article 5-Permanent establishment 1. For the purpose of this convention, the term 'PE' means a fixed place of business through which the business of enterprise is wholly or partly carried on. 2. The term 'PE' shall include: .............. (i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months. .............." 9. In view of the above treaty provisions, it is unambiguous that a PE refers to a fixed place of business through which business of the enterprise is wholly or partly carried on, and includes, inter alia, "a building site or construction or assembly project, or supervisory activities connected therewith, where such site, project or supervisory activity continue for a period of more than nine months." In a way, thus, the permanence test for existence of a PE stands substituted, to this limited extent, by a duration test for certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rture from this rule as evident from the wordings used in definition clauses of corresponding PEs. Take for example, art. 5(2)(k) of India-Australia tax treaty [(1992) 101 CTR (St) 64 : (1992) 194 ITR (St) 241], which states that "the term 'PE' shall exclude especially.... a building site or construction, installation or assembly project, or supervisory activities in connection with such a site or project, where that site or project exists or those activities are carried on (whether separately or together with other sites, projects or activities) for more than six months." In the case of India-Thailand tax treaty [(1986) 56 CTR (St) 22 : (1986) 161 ITR (St) 82], the definition for this type of PE, which finds place in art. 5(2)(h) of the said treaty, is worded as "a building site or construction or assembly project, or supervisory activities in connection therewith, where such site, project or activity continues for the same or a connected project for a period or periods aggregating to more than 183 days". Similar are the provisions in India's tax treaties with Austria [(2001) 170 CTR (St) 32 : (2001) 251 ITR (St) 97], Belgium [(2001) 165 CTR (St) 15 : (2001) 247 ITR (St) 39], Bulg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test of minimum length of time as in the situation before us, has left scope of abuse of these provisions such as by artificially splitting the contracts, each covering a period of less than threshold limit and each attributed to different company owned by the same group. Recognizing this fact, the OECD Commentary, dealing with the twelve month test for construction assembly and project site prescribed in the OECD Model Convention, observes that, "apart from the fact that such abuses may, depending on the circumstances, fall under the application of legislative or judicial anti-avoidance rules, countries concerned with this issue may adopt solutions in the framework of bilateral negotiations". The OECD Commentary further recognizes that a building site should be regarded as a single unit, even if it is based on several contracts, provided it forms a coherent whole commercially and geographically, and that in a situation in which the very nature of construction or installation project may be such that the contractor's activity is to be relocated continuously or at least from time to time (e.g. construction of roads and canals, dredging of waterways or laying of pipelines), the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contriving the affairs as to wrongfully entitle the assessee to treaty benefits. No doubt, in order to enable the Revenue authorities to discharge this onus, the assessee must comply with reasonable requisitions of the Revenue authorities and truthfully share the information available with him, but the exercise to establish treaty abuse is to be conducted by the Revenue authorities. Unless that exercise is conducted, it cannot be open to disregard the claim of the assessee by simply making vague and generalized claims about artificial splitting of contracts and about the sham arrangements to defeat the treaty provisions. In the case before us, no such exercise is carried out. In the orders of the authorities below, a reference is made to the contracts having been awarded by one entity directly or indirectly, and the fact that the work is carried out at the same place but these facts, by themselves, does not put the case in the category in which treaty provisions are abused by artificial arrangements, and, for that reason alone, the time spent on all the activities is required to be aggregated. The aggregation of time spent on various activities, on account of artificial splitting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbly floor, paint shop and weld shop", yet the Tribunal came to the conclusion that "it cannot be said that all contracts put together formed a coherent whole commercially or geographically". On a conceptual note also, merely because different construction, project or supervisory activities are being carried out at nearby physical locations, these activities, for this reason alone, are not required to be seen in conjunction with each other. A construction site or project site inherently lacks permanence, since the construction, assembly, project or supervisory activity are supposed to continue for a limited time only i.e., till the objective is achieved, and it is perhaps for this reason that the fictional PE for these types of activities is created so as to meet the situations when no PE taxation is triggered under the basic rule. This deeming fiction is to be applied for each construction or project site or supervisory activity in connection therewith. This deeming fiction, like all deeming fictions, is to be applied strictly. As an enterprise working in the other Contracting State, the situs of performing the activities, which triggers this, fictional PE, is not necessarily a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the commentaries agreed upon a specific criterion though they used an ambiguous one in the text of the commentaries. However, under treaty interpretation based on Vienna Convention, the intentions of the contracting parties are considered to be expressed in the treaty text. If the relatively precise criterion 'identical client' was intended, this would have been probably indicated by using a less ambiguous term than 'commercially coherent whole'..... 15. In the case of Sumitomo Corporation vs. Dy. CIT, as we have noted earlier, a Co-ordinate Bench of this Tribunal has also impliedly rejected the emphasis on commonality of principal. While doing so, the Tribunal has, inter alia, observed as follows: "79. Article 5(4) replaces the permanence element for existence of PE by the test of minimum length of time. In a case where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. Klaus Vogel in his commentary on Double Taxation Conventions, at p. 308, has following to say on this aspect: 'The question whether there is a PE in a specific Contracting Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its scope, and which can at best be loosely defined, but it is also somewhat unworkable in practical situations. In US Model Convention's Technical Explanation (Technical Explanation to US Model Income-tax Convention-1996), reference to "commercial and geographical coherence" is 'substituted by reference to the contracts or projects being "interdependent both commercially and geographically", and the said commentary, inter alia, states that "a series of contracts or projects by a contractor that are interdependent both commercially and geographically are to be treated as a single project for purposes of applying the twelve month (duration) threshold test". The 'interdependence' test is something that can perhaps be applied with lesser ambiguity vis-a-vis 'cohesion' test simplicitor, and lesser ambiguity is certainly preferable. In any event, the highest common factor in both the examples set out in the OECD and UN commentary is this 'interdependence' or 'interconnection'. In view of the discussions above, we are of the considered view that the true test must lie in examining whether or not the activities performed by the enterprise in various projects or sites are interconnected an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eteen months since the first invoice was raised on 1st Nov., 1996 and the last invoice was raised on 4th May, 1998. It is, however, noted that the commencement date, as per the contract, was 1st Nov., 1996 and the completion date of the contract was specified as 31st May, 1997. In appeal, the assessee had pointed out to the CIT(A) the invoices in question were for mobilization advance (invoice dt. 1st Nov., 1996) and for sail out of the Derrick Barge from outside India (invoice dt. 4th May, 1998), which have nothing to do with the actual work carried out at the site. It was also submitted that the actual work, as per completion certificates which were filed during the assessment proceedings, was started on 5th Feb., 1997 and ended on 31st May, 1997. The CIT(A), however, did not adjudicate on these factual issues as she concluded that the total time spent on all the contracts in India put together exceeds nine months, and, for that reason alone, the assessee could be said to have a PE in India. 19. Having held that the aggregation of time on various contracts in India is not required, this is nevertheless to be examined whether time spent on a specific contract is more than nine m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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