TMI Blog2010 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... tated in the said protocol to Indo-UK tax treaty is nothing other than what is anyway within the scope of the construction PE clause, as analyzed in the OECD Model Convention Commentary (adopted by the UN Model Convention Commentary as well)-an analysis, with which we are in considered agreement. The protocol provision is merely clarificatory in nature and is apparently set out as a measure of abundant caution. The absence of similar protocol clarification in other tax treaties entered into by India would not, therefore, warrant a different interpretation of the treaty provision. There are two important issues, therefore, 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 effect in a tax treaty, so as to give a reasonable meaning to definition of a PE in respect of building, construction, or assembly project or supervisory activity in connection therewith. In our considered views, these are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hire for barges is concerned, the taxability u/s. 44BB is upheld and confirmed. Levy of interest u/s. 234B and 234C - AR as agreed that the issue is now covered in favour of the assessee by a large number of decisions of the Tribunal, including Special Bench decision in the case of Motorola Inc. vs. Dy. CIT [ 2005 (6) TMI 226 - ITAT DELHI-A] which has since been approved by the Hon'ble jurisdictional High Court in the case of Director of IT (International Taxation) vs. NGC Network Asia LLC[ 2009 (1) TMI 174 - BOMBAY HIGH COURT] . Therefore, the order of the AO is partly restored and, to that extent, grievance of the AO is upheld. In the result, the appeal is partly allowed. - Member(s) : PRAMOD KUMAR., SMT. P. MADHAVI DEVI. ORDER-PRAMOD KUMAR, A.M.: This is all appeal filed by the AO, and is directed against the order dt. 26th Nov., 2004 passed by the CIT(A) in the matter of assessment under s. 143(3) of the IT Act, 1961 (hereinafter referred to as 'the Act'), or the asst. yr. 2001-02. The grievances raised in the memorandum of appeal, which are by way of questions requiring our adjudication, are as follows: "1. Whether, on the facts and in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kier International C 99/06 Charter of barge JU 253 for PPN power project US$ 1,436,777 -------------------------------------------------------------------- 3. In the course of the assessment proceedings, it was submitted by the assessee that, as far as contract No. C 99/07 with Arcadia Shipping was concerned, it was for replacement of B 121 main deck with temporary deck, and income from this activity was in the nature of business profits which could only be taxed under art. 7 of the India-Mauritius tax treaty. The assessee also submitted that the said taxability could only arise in the event of assessee having a PE in India, and since the assessee did not have any PE in India, the income from this contract was not taxable in India. It was also pointed out that the total duration of work under this contract in India was only one hundred days which was less than threshold limit of nine months, as applicable for construction PE, under the India-Mauritius tax treaty. As regards the contract No. C 99/05 with Arcadia Shipping Ltd., it was submitted by the assessee that the said contract was for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia-Mauritius tax treaty, a PE will include "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" but, for the purpose of applying this threshold limit of PE duration, each of the contract was to be examined separately. It was pointed out that the word 'contract' is used in singular and not plural, and the reference is, for this reason also, clearly for individual contract. The assessee also referred to the OECD Commentary and literature on 'Permanent Establishment' in support of the legal contentions embedded in his arguments. None of these contracts was for duration of more than nine months, and for that reason, according to the assessee, the case of the Revenue fails on duration test. The assessee thus claimed that the only mistake that the assessee has made in its IT return is in offering an income to tax which was not in fact taxable i.e., revenue earned under contract No. C 99/05 with Arcadia Shipping Ltd. 4. None of these submissions, however, impressed the AO. The AO observed that there was no specific reason assigned in the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the treaty provisions. As regards contract No. C 99/07, the AO observed that since this contract was for replacement of B 121 main deck, with the temporary deck, this was also in connection with providing facilities covered by s. 44BB, and, accordingly income was to taken @ 10 per cent on gross basis, which will return in taxability @ 4.8 per cent on the gross amount. It was also noted that, as discussed above, the assessee has a PE in India, the assessee does not get any relief from the said taxability under Indian IT Act. Finally, with regard to the charter of Barge JU 253, the AO held that the assessee has earned money from barge hire in the domestic traffic, and it will be reasonable to estimate profits from the same @ 10 per cent of gross revenues. He thus proceeded to tax 10 per cent of the receipts on account of this barge hire as income of the assessee liable to be taxed in India. Without prejudice to this stand, the AO also observed that in case it was to be held that the assessee did not have any PE in India, since barge hire is admittedly covered by consideration for "use of industrial, commercial or scientific equipment", the assessee will be liable to be taxed @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therewith, where such site, project or supervisory activity continues for a period of more than nine months. ............" 8. 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 types of business activities, i.e. building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time-limit of nine months, even if there exists a PE under the general rule of art. 5(1), it will be outside the ambit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aty having such a specific provision that a barge could be treated, by itself, a PE, but then no such provisions exist in the India-Mauritius tax treaty. Learned counsel has also invited our attention to the fact that in the said case, the Australian Federal Court did not even see need to address the issue of treating barge as a PE under the basic rule, i.e., art. 5(1) in the present context. This also shows, as we have noted above, that by no stretch of logic, when an assessee is in the business of hiring out the barges, a barge so hired out can be viewed as a place of carrying on its business, which, as we understand, is limited to, qua that barge, the barge having been so hired out. Secondly, treating a project site as PE under the main rule, i.e., art. 5(1), cannot be without taking into account the provisions of art. 5(2)(i) because in the case of a construction, installation or project site, as we have noted above, what is given in art. 5(2)(i) is a test of permanence, howsoever arbitrary as it may be, for the purpose of art. 5(1). Article 5(1) and art. 5(2)(i) of the India-Mauritius tax treaty, in such cases, are required to read together rather than read on standalone basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 of 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], Bulgaria [(l996) 132 CTR (St) 32 : (1996) 220 ITR (St) 30], Canada [(1998) 144 CTR (St) 48 : (1998) 229 ITR (St) 44], China [(1995) 125 CTR (St) 1 : (1995) 214 ITR (St) 160], Denmark [(1989) 80 CTR (St) 15 : (1989) 180 ITR (St) 1], Italy [(1996) 132 CTR (St) 13 : (1996) 220 ITR (St) 3], New Zealand [(1987) 63 CTR (St) 16 : (1987) 166 ITR (St) 90], Norway [(1988) 67 CTR (St) 145 : (1988) 169 ITR (St) 15], Spain [(1995) 125 CTR (St) 48 : (1995) 214 ITR (St) 197], Turkey [(1997) 137 CTR (St) 30 : (1997) 224 ITR (St) 145] and US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction PE clause, as analyzed in the OECD Model Convention Commentary (adopted by the UN Model Convention Commentary as well)-an analysis, with which we are in considered agreement. The protocol provision is merely clarificatory in nature and is apparently set out as a measure of abundant caution. The absence of similar protocol clarification in other tax treaties entered into by India would not, therefore, warrant a different interpretation of the treaty provision. 11. There is unanimity in OECD and UN Model Convention Commentaries that the duration test "applies to each individual site or project". In para 18 of the OECD Model Convention Commentary to art. 5 [OECD Model Tax Convention on Income and Capital, 1992 (as updated in 2005)], it is specifically stated so. UN Model Convention Commentary [UN Model Tax Convention between Developed and Developing Countries, 2001], in para 11 of its commentary on art. 5. However, this replacement of or modification of-whichever way one views it, permanence test for existence of PE, by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is whether different places of activities, of an enterprise in the other Contracting State, are one place of business or different places of business. If one comes to the conclusion that these are different places of business, matter ends here. However, if these places are seen as one place of business, the next thing to be ascertained, i.e. commercial coherence, is whether the work done at these sites constitutes one business venture, consisting of one or more contracts, or different business ventures altogether. 12. There are two important issues, therefore, 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 effect in a tax treaty, so as to give a reasonable meaning to definition of a PE in respect of building, construction, or assembly project or supervisory activity in connection therewith. In our considered views, these are only two sets of circumstances in which time on each set of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of time spent on various activities, on account of artificial splitting of contract by the assessee or other modes of treaty abuse, cannot thus apply unless the reasons embedded in this approach are established by the Revenue. That is not the situation before us. 14. In our considered view, the only other situation in which aggregation of time spent of various activities is to be done is when the activities are so inextricably interconnected or interdependent that these are essentially required to be viewed as a coherent whole. 14.1 The test of 'commercial and geographical coherence' thus does find a mention in the OECD Commentary but interestingly, this test refers to such a degree of coherence that the different units, taken together, form a 'coherent whole-geographically and commercially'. That is almost the same thing as different units being viewed as one place of business. That cannot be equated with mere commercial and geographical coherence simplicitor in the normal course of business situations. The ambiguity of commercial and geographical coherence test apart, this test is not of universal application nor can it be construed as a conclusive test. There could be ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the enterprise, and, therefore, on the question whether or not the enterprise is carrying on the business through the PE. As for the 'commercial coherence', there is hardly any consensus on its connotations either. Professor Arvid Skaar, a well known Norwegian international tax scholar, in his book "Permanent Establishment-Erosion of a Tax Treaty Principle" [Third Indian Reprint 2009, published by Kluwer Law International-at p. 355] suggests that "it can normally be assumed that projects conducted under the same contract, i.e. the same document, will be considered a coherent whole" and expresses dissatisfaction about lack of clarity on the issue by adding that "apart from the assumption that one contract is one project, the identification rules of commentaries are sparse and obscure". There are quite diversified opinions on the connotations of 'coherent whole' or 'commercial coherence'. On one end of the spectrum, there is a decision of the Belgian Cour'd Appel Anvers 23 ET 387 (1983) [referred to in Klaus Vogel on Double Taxation Conventions (Third Edition)-p. 308] which seems to suggest that 'the same ordering party' will constitute commercial coherence, on the other end of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each individual place of business existing there as well. In this connection, the place where individual activity is performed may very well be relocated, for instance, where a road is being constructed in stages. If, in contrast, all building sites maintained in one State are treated as one single PE, this would in effect tantamount to force of attraction principle. Moreover, this would violate the principle that various business activities performed by one and same enterprise, none of which constitutes a PE, cannot lead to a PE, if combined.' This above rule is, however, subject to exceptions viz. where each building site or installation site forms a coherent whole in the other country and is operated at one place and by the same ordering party. The thrust of learned counsel for the Revenue has been on this exception to the rule. We have already highlighted the fact that each purchase order was independent and did not complement each other. The MUL YE 2 project would not stand concluded with the execution of these purchase orders. The assessee was not the only person rendering these supervisory services. The sites were located at different places viz. assembly floor, paint shop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature as to be viewed only in conjunction and as a coherent whole, in our humble understanding, there is no justification in aggregation of time spent on various business activities, sites or projects of the enterprise. In this view of the matter, strictly speaking, it is not really relevant whether the activities so carried out by the enterprise are for the same principal or different principals. The relevant considerations, in our considered view, are the nature of activities, their interconnection and interrelationship and whether these activities are required to be essentially regarded as a coherent whole in conjunction with each other. 17. It is thus clear that the justification for aggregation of time spent by the assessee on different project sites, for applying threshold of duration test, is not sustainable. Neither the work having been carried out for the same principal is sufficient to justify the aggregation of time spent on all the projects, nor the fact that this work was carried out in the same area, 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 f ..... 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