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Director Of Income Tax - Ii (International Taxation) Vs. National Petroleum Construction Company
February, 08th 2016
            IN THE HIGH COURT OF DELHI AT NEW DELHI
%                                                    Judgment delivered on: 29.01.2016

+                         ITA 143/2013

        NATIONAL PETROLEUM CONSTRUCTION
        COMPANY                        ..... Appellant
                                   Through Mr C.S. Aggarwal, Senior Advocate with
                                   Mr Prakash Kumar and Mr Pawan Kumar, Advocate.

                                   versus

        DIRECTOR OF INCOME TAX
        (INTERNATIONAL TAXATION)                                   ..... Respondent
                                   Through Mr N.P. Sahni, Senior Standing Counsel
                                   with Mr Nitin Gulati, Advocate.

                                   WITH

+                         ITA 533/2013
        DIRECTOR OF INCOME TAX - II
        (INTERNATIONAL TAXATION)                                      ..... Appellant
                                   Through Mr Rahul Chaudhary, Senior Standing
                                   Counsel with Mr Ruchir Bhatia, Advocate.

                                   versus

        NATIONAL PETROLEUM CONSTRUCTION
        COMPANY                        ..... Respondent
                                   Through Mr C.S. Aggarwal, Senior Advocate with
                                   Mr Prakash Kumar and Mr Pawan Kumar, Advocate.

                                   WITH

+                         ITA 144/2013
        NATIONAL PETROLEUM CONSTRUCTION
        COMPANY                        ..... Appellant



ITA 143/2013 & Other Connected Matters                                         Page 1 of 54
                                    Through Mr C.S. Aggarwal, Senior Advocate with
                                    Mr Prakash Kumar and Mr Pawan Kumar, Advocate.

                                   versus

        DIRECTOR OF INCOME TAX
        (INTERNATIONAL TAXATION)                                       ..... Respondent
                                   Through Mr N.P. Sahni, Senior Standing Counsel with
                                   Mr Nitin Gulati, Advocate.

                          AND

+                         ITA 795/2014
        DIRECTOR OF INCOME TAX ­II
        (INTERNATIONAL TAXATION)                                      ..... Appellant
                                   Through Mr Rahul Chaudhary, Senior Standing
                                   Counsel with Mr Ruchir Bhatia, Advocate.

                                   versus

        M/S NATIONAL PETROLEUM
        CONSTRUCTION CO.                                           ..... Respondent
                                   Through Mr C.S. Aggarwal, Senior Advocate with
                                   Mr Prakash Kumar and Mr Pawan Kumar, Advocate.

CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU

                                            JUDGMENT

VIBHU BAKHRU, J

1.      These appeals have been filed under Section 260A of the Income Tax

Act, 1961 (hereafter the `Act') calling into question orders dated 5th October,

2012 and 31st January, 2013 passed by the Income Tax Appellate Tribunal



ITA 143/2013 & Other Connected Matters                                         Page 2 of 54
(hereafter the `ITAT') in ITA No. 5168/Del/2010 and ITA No. 5763/Del/2011

respectively. The said appeals were filed by the Assessee assailing the

assessment orders dated 26th October, 2010 and 18th November, 2011 for the

assessment years (AY) 2007-08 & 2008-09 respectively. Whilst ITA No.

143/2013 and 144/2013 have been preferred by the Assessee, ITA 795/2014 and

533/2013 have been preferred by the Revenue.


2.      The controversy involved in the present appeals principally relates to the

taxability of income earned by the Assessee in respect of a contract entered into

by it with ONGC Limited, a public sector enterprise (hereafter `ONGC').The

aforesaid contract entailed designing, engineering, procurement, fabrication of

fully loaded offshore platform and its installation, testing and commissioning at

an offshore facility of ONGC. According to the Revenue, the income from the

said contract is liable to be taxed in India as the Assessee is stated to have a

Permanent Establishment (PE) in India. According to the Assessee, its income

from the contract in question is not taxable under the Act by virtue of the

Double Taxation Avoidance Agreement between India and United Arab

Emirates (UAE) (hereafter referred to as the `DTAA'). The Assessee claims

that it does not have a PE in India and further, in any event, the income from

fabrication and supply of platform is not taxable as the same pertains to the

Assessee's activities outside India.




ITA 143/2013 & Other Connected Matters                                   Page 3 of 54
3.      Whilst the ITAT had rejected the Assessee's contention that it does not

have a PE in India, it accepted the Assessee's contention that the contractual

receipts from ONGC were separable and the amount received for fabrication

and supply of platform outside India was not taxable under the Act. This has led

both the Assessee and the Revenue to assail the orders passed by the ITAT.


4.      These appeals were admitted and the following questions of law were

framed in the appeals preferred by the Assessee (ITA 143/2013 and 144/2013):-


         "1.     Whether the Income Tax Appellate Tribunal was correct in
                 holding that the appellant had a fixed place of business or
                 permanent establishment in India as defined in Article
                 5(2)(c) of the Double Taxation Avoidance Agreement
                 between India and UAE.

          2.     Whether the Income Tax Appellate Tribunal was justified
                 and correct in holding that the installation permanent
                 establishment under Article 5(2)(h) of the Double Taxation
                 Avoidance Agreement between India and UAE is not
                 dependent on the date of actual start of execution of the
                 contract but had come into existence on the date of award of
                 contract?

          3.     Whether the income Tax Appellate Tribunal was right in
                 holding that Arcadia Shipping Ltd. was a dependent agent
                 permanent establishment of the appellant in India under
                 Article 5 of the Double Taxation Avoidance Agreement
                 between India and UAE.

          4.     Whether the 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.



ITA 143/2013 & Other Connected Matters                                      Page 4 of 54
          5.     Whether the order of the Income Tax Appellate Tribunal
                 violates and is contrary to Article 7(6) of the Double
                 Taxation Avoidance Agreement between India and UAE."

5.      The following questions of law were framed in the appeals preferred by

the Revenue (ITA 795/2014 and 533/2013):-


         "1.     Did the ITAT fall into error in holding that the assessee's
                 contract with the ONGC was divisible in the circumstances
                 of the case;

          2.     Did the ITAT erred in law in holding that no income
                 accrued to the assessee on account of offshore supplies it
                 made;

          3.     In case question no.(2) is answered in favour of the
                 Revenue, the appropriate margin of profit attributed, i.e.
                 25% and 28%."

6.      Briefly stated, the aforesaid questions arise in the backdrop of the

following facts:-


6.1     The Assessee is a company incorporated under the laws of UAE and is a

tax resident of that country. The Assessee is, inter alia, engaged in fabrication

of petroleum platforms, pipelines and other equipment and in addition, the

Assessee also undertakes contracts for installation of petroleum platforms,

submarine pipelines and pipeline coating at various sites. In the course of its

business, the appellant tendered for and entered into contracts with ONGC for

the installation of petroleum platforms and submarine pipelines. The first such

contract was entered into by the Assessee during the previous year 1996-97



ITA 143/2013 & Other Connected Matters                                     Page 5 of 54
relevant to the AY 1997-98. On 28th August, 2005, the Assessee was awarded a

contract      for     4    Well      Platform Project-II   (termed   as   Contract    No.

MR/OW/MM/NHBS4WPP and hereafter referred to as `4WPP Contract'). The

Assessee had tendered for the aforesaid contract pursuant to a global tender

floated by ONGC in July, 2005. This was the third contract between the

Assessee and ONGC. Subsequently, the Assessee entered into another contract

for C-Series Project (termed as Contract No. MR/OW/MM/C-Series/03/2006,

hereafter referred to as `C-Series Contract') on 23rd November, 2006.


6.2     The scope of work as described in the "General Conditions of C ontract"

of both the 4WPP Contract and C-Series Contract included "Surveys (pre-

engineering, pre-construction/pre-installation and post-installation), Design,

Engineering, Procurement, Fabrication, Anticorrosion & Weight coating (in

case of rigid pipeline, Load-out, Tie-down/Sea fastening Tow-out/Sail-out,

Transportation, Installation, Hook-up, Installation of submarine pipelines,

installation and hook-up of submarine cables, Modifications on existing

facilities, Testing, Pre-commissioning, Commissioning of entire facilities as

described in the bidding document".


6.3     The said contracts included various activities. Whilst the activities

relating to survey, installation and commissioning were done entirely in India,

the platforms were designed, engineered and fabricated overseas - at Abu




ITA 143/2013 & Other Connected Matters                                          Page 6 of 54
Dhabi. A tabular statement indicating the activities carried out in India and

overseas as asserted by the Assessee, is reproduced below:-


Activity                  Inside       India        (i.e. Outside India (Abu
                          Installation              and Dhabi)           (i.e.
                          Commissioning)                  Fabrication)
Survey (Pre-Engineering, 
Pre-construction / Pre-
installation
Design & Engineering                                      
Procurement of material                                   
Fabrication                                               
Load out, Tie down, tow- Partly                           Partly
out and transportation of                                 
fabricated structure to
India
Installation,   submarine 
cable laying
Hook-up, testing, pre- 
commissioning
Start up & commissioning 


6.4     The Assessee has been filing its Income Tax Returns for the AYs

commencing from 1997-98. The Assessee's income under the Act has been

computed on a presumptive basis by taxing the gross receipts pertaining to the

activities in India less verifiable expenses at the rate of 10% and the receipts

pertaining to activities outside India at the rate of 1%. The Assessee also

adopted the said basis for computing its assessable income and filed its returns

for AY 1999-00 onwards accordingly. The returns filed by the Assessee for AY

2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of the

Act. However, the returns filed by the Assessee for AY 2007-08 and 2008-09 ­



ITA 143/2013 & Other Connected Matters                                 Page 7 of 54
which are involved in the present appeals ­ were not accepted by the Assessing

Officer (hereafter `AO').

Proceedings before the AO/DRP

7.      The AO passed a draft assessment order dated 31st December, 2009 under

Section 144(5) of the Act for the AY 2007-08. The AO held that the Assessee

had a Fixed Place PE in India in the form of a Project Office at Mumbai. The

AO further held that Arcadia Shipping Ltd. (ASL) constituted a Dependent

Agent PE (hereafter also referred to as `DAPE') of the Assessee in India. In

addition, the AO held that the Assessee also had a Installation/Construction PE

in India.


7.1     Insofar as the Assessee's contention that the fabricated material was sold

to ONGC outside India is concerned, the AO held that the contract was a

turnkey and a composite contract and was not divisible as claimed by the

Assessee. Accordingly, he held that the entire contractual receipts including the

activities performed outside India were taxable in India. The consideration

received by the Assessee for design and engineering was held to be Fees for

Technical Services (hereafter 'FTS'). Since, the Assessee had not maintained

separate books pertaining to the contract, the AO estimated the Assessee's profit

to be 25% of the consideration received from ONGC. The Assessee's

contention that it should be taxed by applying provisions of Section 44BB of the




ITA 143/2013 & Other Connected Matters                                   Page 8 of 54
Act was rejected as the AO held that the activities carried out by the Assessee

were not covered under that Section.


8.      The Assessee did not accept the Draft Assessment Order and filed its

objections before the Dispute Resolution Penal (`DRP'). The DRP held that

Article 5 of the DTAA provided an inclusive definition of `Permanent

Establishment' (PE) and that the Assessee's Project Office constituted a PE of

the Assessee in India. The DRP reasoned that:


        (i) the Assessee itself had shown the Project Office as its PE in the

earlier years as well as in the AY 2007-08 and had subsequently sought to

change its stand on the basis of the ITAT's judgment in the case of DCIT v

Hyundai Heavy Industries Limited;


        (ii) the Assessee had informed the Reserve Bank of India that its Project

Office was for the purposes of undertaking the project with ONGC and this

established that the Project Office was established to undertake the project and

not any ancillary or auxiliary activity;


        (iii) before submitting the bid, Assessee undertook a pre-bid survey and

the Assessee's communication to ONGC indicated that the Assessee had

familiarized itself with the Marine Sea, Land-surface and            sub-surface,

metrological, oceanographic, climatological and environmental conditions

which may exist in the installation area. Further, the Assessee had also



ITA 143/2013 & Other Connected Matters                                  Page 9 of 54
familiarized itself with other aspects of the project. This, according to the DRP,

indicated that the pre-bid survey was conducted through the Project Office

which was directly connected with the contract in question;


        (iv) during the period of negotiation of the contract, employees of the

Assessee had attended the meeting with ONGC on 16th December, 2005 and

this included the employees of the Project Office. The DRP observed that the

Assessee had not disputed that the concerned persons were employees of its

project;


        (v) the minutes of the kick-off meeting clearly mentioned that the review

of engineering documents would be done in Mumbai. Thus, all the negotiation

and approval was done in Mumbai after the hard copy of the design was

received by ONGC;


        (vi) that the contract lasted for approximately two years and it was not

possible for a contract of this magnitude to be executed without the Assessee

having a fixed place of business in India;


        (vii) the Assessee's office in India provided a fixed place for the

employees of the Assessee visiting India for execution of the project from time

to time and it was not necessary that the permanent employees at the Project

Office be directly involved in the execution of the project;




ITA 143/2013 & Other Connected Matters                                  Page 10 of 54
8.1     Insofar as ASL is concerned, the DRP concurred with the AO that ASL

was a DAPE of the Assessee for the reasons stated below:


        (i) that ASL was actively involved in the project since pre-bid meetings,

hard core marketing and business development till finalization of the contract;


        (ii) that the communications issued by the Assessee as well as ASL to

ONGC expressly stated that ASL represented the Assessee as its Agent;


        (iii) that the address of the employees of the Assessee was mentioned as

ASL's address in the application to the Ministry of Home Affairs.


8.2     The DRP rejected the Assessee's contention that it had an Installation PE

as described under Article 5(2)(h) of the DTAA for a duration of less than nine

months and, therefore, the same could not be considered as a PE of the Assessee

in terms of the DTAA. The DRP held that since the Assessee had contended

that payments for engineering, procurement of material and fabrication could

not be treated as FTS as being a part of the consideration for installing the

platform, the Assessee could not treat those activities as separable for the

purposes of limiting the duration of its PE in India and/or splitting the income

between that arising overseas and in India. The DRP, accordingly, held that the

Installation PE of the Assessee came into existence at the stage of

commencement of the contract. The DRP observed that pre-engineering or pre-

design survey ­ which was claimed to be done by a sub-contractor employed by



ITA 143/2013 & Other Connected Matters                                  Page 11 of 54
the Assessee ­ was an integral part of the contract and the time spent by the sub-

contractor would also constitute the time spent by the Assessee under the

DTAA. Thus, the DRP reasoned that the existence of a PE would commence

from the date the sub-contractor started his job at the site of ONGC.


8.3     The DRP rejected the contention that the contract was a divisible contract

and the income of the Assessee for the activities done outside India was not

taxable under the Act. The DRP held that the title in the goods passed to ONGC

in India and on the said basis distinguished the judgment of the Supreme Court

in the case of Commissioner of Income Tax & Anr. v. Hyundai Heavy

Industries: (2007) 291 ITR 482 (SC) where platforms were delivered to the

agents of ONGC in Korea. For the same reason, the DRP also held that CBDT

Instruction No. 1767 was not applicable to the facts of the present case.


8.4     The DRP also concurred with the AO that the payment in respect of

drawings and design were FTS and in the event it was held that the Assessee did

not have a PE in India, the aforesaid payment would be taxable under the Act as

FTS. The DRP also rejected the Assessee's contention that Section 44BB of the

Act was applicable. It held that the contract in question was a turnkey contract

in the nature of a works contract and could not be considered as a contract for

services as envisaged under Section 44BB of the Act.


8.5     As regards the computation of profit is concerned, the DRP held that

since the Assessee had neither produced any accounts nor submitted any basis

ITA 143/2013 & Other Connected Matters                                      Page 12 of 54
to substantiate its claim as to the profit margin adopted by the AO, the same was

required to be estimated. The DRP, thereafter, noted the profit margins of four

other companies which were taken as comparable to the Assessee and found

that the average profit margin of those companies was 24.7%. On that basis, the

DRP held that the profit margin of 25% of gross receipts estimated by the AO

was justified.


9.      Thereafter, the AO passed an assessment order dated 26th October, 2010

under Section 143(3) read with Section 144C of the Act.


Proceedings before the ITAT


10.     Aggrieved by the assessment order, the Assessee preferred an appeal

before the ITAT. The ITAT concurred with the AO and rejected the Assessee's

contention that it did not have a PE in India. The ITAT observed that the

Assessee had itself shown the Project Office in Mumbai as its PE in India and

the Assessee's employees were present during the negotiation of the contracts in

question. The ITAT further reiterated the DRP's observation that the Assessee

had not disputed that the employees of the Project Office also attended the kick-

off meeting with ONGC. The ITAT also concurred with the DRP's conclusion

that it was not possible for the Assessee, a non-resident company, to execute a

contract which lasted for approximately two years without having any place of

business in India from where the project could be managed. Accordingly, the

ITAT concluded that the Assessee's Project Office in India was its PE.

ITA 143/2013 & Other Connected Matters                                   Page 13 of 54
10.1 The ITAT concurred with the AO that ASL was a DAPE of the Assessee.

The ITAT concurred with the finding of the AO/DRP that ASL was working

wholly and exclusively for the Assessee. The ITAT held that ASL's presence in

the business meetings also indicated that ASL was engaged in the hard core

business development activity of the Assessee in India and its role was not

limited merely for collecting information as claimed by the Assessee.


10.2 The ITAT rejected the Assessee's contention that its Installation PE

existed only when the barges carrying the platforms entered the territorial

waters of India. It concurred with the AO's decision that the Assessee had a PE

in India even prior to the notification of award of the contract.


10.3 However, the ITAT accepted the Assessee's contention that the contract

in question could be segregated into offshore and onshore activities and the

Assessee's income for the activities carried out outside India could not be

attributed to its PE in India. Accordingly, it held that the profits attributable to

design, procurement of material and fabrication could not be taxed in India. The

ITAT rejected the Assessee's contention that the tax payable should be

computed as per the formula adopted in the preceding years (i.e. 10% of the

receipts attributable to activities in India less expenses in India and 1% of the

receipts attributable to activities carried out overseas). The ITAT also did not

accept the Assessee's contention that Section 44BB of the Act was applicable.


Submissions on behalf of the Assessee

ITA 143/2013 & Other Connected Matters                                    Page 14 of 54
11.     Mr C.S. Aggarwal, learned Senior Counsel appearing for the Assessee

submitted that the Assessee had established the Project Office only to comply

with the contractual requirements and the applicable exchange control

regulations. The Project Office merely acted as a communication channel

between the Assessee and ONGC and apart from that, it had no other role to

play. He pointed out that the addresses of the project offices in the past were

different and the said project offices had been established only for the contracts

entered into earlier. He submitted that, therefore, the existence of the Assessee's

project offices in the past could not be linked to the Project Office established

for the purpose of the contracts in question. He argued that the AO erred in

holding that the Assessee had carried its business in India through a PE by

alluding to the project offices established by the Assessee in respect of prior

contracts.




11.1 Mr Aggarwal submitted that the only activity carried out by the Assessee

in India was the installation and commissioning of the platforms which was

carried out by the Assessee's employees at the offshore site with the help of

barges. He submitted that the pre-engineering and pre-construction surveys

were done by an independent third party, M/s Fugro-Geonics Pvt. Ltd., an

Indian company which was engaged on a principal-to-principal basis.              He

contended that the finding that the Project Office was involved in pre-bid

meetings and/or survey and/or kick-off and/or review meetings was erroneous



ITA 143/2013 & Other Connected Matters                                   Page 15 of 54
as these meetings were attended by the Assessee's employees from Abu Dhabi

and the Project Office was not involved.


11.2 Mr Aggarwal contended that the Project Office acted as Assessee's

backoffice for liaison, coordination and collection of information from ONGC.

Mr Aggarwal relied upon the decisions in CIT v. BKI/HAM: (2012) 347 ITR

570 (Uttarakhand); Cal Dive Marine Construction (Mauritius)Ltd., In Re:

(2009) 315 ITR 334 (AAR); and DIT v. Hyundai Heavy Industries Co. Ltd.:

(2009) 31 SOT 482 (ITAT[Del]) in support of his contention that the

Assessee's activity of installation and commissioning of platforms could be

examined only in the light of the provisions of Article 5(2)(h) of the DTAA. Mr

Aggarwal relied on the decision of UAE Exchange Centre Limited v. UOI:

(2009) 313 ITR 94 (Del) and IAC v. Mitsui &. Co. Ltd.: (1991) 39 ITD 59

(ITAT[Del]) in support of its contention that the back office function of

collection of information was specifically excluded from the purview of PE by

virtue of Article 5(3)(d) and 5(3)(e) of the DTAA.


11.3 Mr Aggarwal further contended that in terms of article 5(2)(h) of the

DTAA, the Installation PE would come into existence only if the construction

or assembling activity continued for a period of nine months or more in India.

He argued that the earliest date which could be considered for calculating the

period would be the date when the barges with the fabricated platforms reached

the work site, that is, on 19th November, 2006. Mr Aggarwal submitted that the


ITA 143/2013 & Other Connected Matters                                Page 16 of 54
pre-engineering and pre-construction surveys were carried out by an

independent Indian company for a period of 9 days and 27 days respectively

and the same did not entail assuming control over the work site. He argued that

the activities of the independent sub-contractor could not be included for

calculating the period of nine months under Article 5(2)(h) of the DTAA. He

further submitted that the time taken for pre-bid activities, notification of award,

signing of the contract and meetings with ONGC were irrelevant for calculating

the existence of an Installation PE since such work did not result in acquiring

control over a work site.


11.4 Mr Aggarwal also disputed the finding that ASL was a DAPE of the

Assessee in India. He submitted that ASL was an independent entity and

carried out substantial business activities other than those related to the

Assessee. Mr Aggarwal also submitted that although the ITAT had accepted the

Assessee's contention that only income from activities carried out in India was

attributable to the PE, it had failed to adjudicate the quantum of the profits

assessable to tax under the Act. He referred to the decision of the Supreme

Court in Hyundai Heavy Industries (supra) in support of his contention that a

profit margin of 10% was appropriate for installation and commissioning of

platforms in India. Mr Aggarwal further submitted that the comparable

companies selected by the DRP for justifying a profit margin of 25% / 28.58%

was erroneous as the said alleged comparable companies were engaged in



ITA 143/2013 & Other Connected Matters                                    Page 17 of 54
providing engineering services while the Assessee was engaged in construction

and installation of pipelines and platforms.     He submitted that the alleged

comparable companies were functionally different and the ITAT had failed to

consider the Assessee's submission in this regard.


11.5 Mr Aggarwal argued that the Assessee had estimated its taxable income

on a consistent basis which had been adopted by the Assessee, which was

accepted by the AO and there was no material on record which would justify a

departure from the consistent methodology accepted earlier. He argued that the

computation of presumptive profit was based on CBDT Instruction No.1767

and principles which were approved by the Supreme Court in Hyundai Heavy

Industries (supra) and, thus, had a sound legal basis.


Submissions on behalf of the Revenue


12.     Mr Sahni, Senior Standing Counsel appearing for the Revenue

controverted the contentions advanced by Mr Aggarwal. He submitted that the

Assessee had filed a return admitting that it had a PE in India and in the

circumstances, a contrary claim could not be made by the Assessee at the time

of the Assessment. He relied upon the decision of the Supreme Court in the case

of Goetze (India) Ltd. v. CIT: (2006) 284 ITR 323 (SC) in support of his

contention. He further referred to the decision of the Supreme Court in

Radhasoami Satsang v. Commissioner of Income Tax: (1992) 193 ITR 321




ITA 143/2013 & Other Connected Matters                                Page 18 of 54
(SC) and contended that the Assessee cannot be permitted to depart from its

consistent stand that had been sustained over the past several years.


12.1 Mr Sahni next referred to The Foreign Exchange Management

(Establishment in India of Branch or Office or Other Place of Business)

Regulations, 2000 issued by the Reserve Bank of India as amended on 2nd July,

2003 and drew the attention of this Court to the definition of 'project office'

which is defined as "a place of business to represent the interest of the foreign

company executing a project in India but excludes a liaison office". He

contended that in the circumstances, the Assessee's contention that the project

office had no role to play in the execution of the project was contrary to the

record.


12.2 Mr Sahni also controverted the Assessee's stand that the Project Office

was only involved in preparatory and auxiliary activities and consisting of only

three employees. He submitted that the reliance placed by the Assessee on the

annual accounts of the PO was not justified as it did not include the cost of

supplies and expenses which were incurred and recorded in the accounts of the

head office. He pointed out that the value of fringe benefits was reported at

Rs.13,45,071/- and, admittedly, payments to the extent of Rs.20,28,66,569/-

were made in India on which TDS had been deducted and paid. He also pointed

out that, admittedly, the TDS returns had been filed by the Project Office in

India. He submitted that in the circumstances, the Assessee's contention that the


ITA 143/2013 & Other Connected Matters                                  Page 19 of 54
Project Office in India had only carried on preparatory and auxiliary activities

was not sustainable.


12.3 Mr Sahni next referred to the 4WPP Contract which specifically provided

that the contractor would be responsible for deployment, transportation,

accommodation and catering of all labour, local or expatriates, and would be

responsible for obtaining all necessary permits and visas from the all concerned

authorities. The contractor (the Assessee) was also responsible for all statutory

compliances under the Income Tax Act, Customs Act, FEMA etc. and this also

indicated that the role of the Assessee's PO in India was no t limited only to

auxiliary or preparatory activities.


12.4 Insofar as the issue relating to the duration of the Installation PE is

concerned, Mr Sahni referred to the terms of the 4WPP Contract which

specifically recorded that the notice of award dated 29th November, 2005 would

be the effective commencement of this contract. He pointed out that the scope

of the work included surveys (pre-engineering, pre-construction/pre-installation

and post-installation) and annexure D and E to the 4WPP Contract mentioned

the dates and the milestone payments, the same also clearly indicated that

activities/works relating to pre-engineering survey/inspection of existing

facilities was to commence as earlier as 3rd December, 2005. The milestone

payment formula also included payments for such activities. He, thus, submitted

that the duration of the Assessee's Installation PE would also commence with


ITA 143/2013 & Other Connected Matters                                  Page 20 of 54
the commencement of the contract. In support of the said contention, Mr Sahni

also referred to the text of "Klaus Vogel on Double Taxation Conventions,

Third Edition", which provided that the minimum period for considering a

construction site/project as a PE of an enterprise would begin when the

enterprise starts to perform business activities on the spot in connection with the

building site or construction or assembly of the project and any interruptions in

the minimum period should also be included for determining the minimum

period. He also referred to the extracts from the commentary by A. Skaar in

support of his contention that time spent on onsite planning would also be

included in computing the duration while considering whether a PE of an

enterprise existed.


12.5 Mr Sahni next urged that ASL was appointed as the sole and exclusive

agent and under the terms of the consultancy agreement had agreed not to

represent a competitor of the Assessee or act in a manner detrimental to the

Assessee's interest. ASL had also participated in the pre-bid meeting held on

23rd August, 2005 and the kick-off meeting held on 16th December, 2005. He

contended that in the circumstances, ASL constituted a DAPE of the Assessee

in India. He further submitted that ASL had no discretionary powers and was

acting at the instance of the Assessee and in the circumstances, even though

ASL had substantial revenue from other activities, it could not be construed as

an independent agent as far as the project in question was concerned.



ITA 143/2013 & Other Connected Matters                                   Page 21 of 54
12.6 In regard to the issue of attribution of income, Mr Sahni contended that

Article 7(6) of the DTAA envisaged that the profits attributable to a PE would

be determined by the same method year by year; but, the said clause also

permitted a departure from the principle for good and sufficient reason. He

submitted that in the present case, the AO as well as the DRP had provided

detailed reasons for not following the method of computing the income as

adopted in the earlier years.            He submitted that the DRP had referred to

comparable companies and the Assessee had not produced any material to

justify its claim that a separate profit margin be adopted. Mr Sahni also

submitted that reference to the CBDT Instruction No. 1767 was misplaced. He

argued that (a) the said instruction was not applicable to the relevant assessment

year; (b) the profit margin of 1% was applicable to outside India revenues in

cases where the sale took place outside India on FOB basis; and (c) that the said

instruction envisaged calculating profit margin at 10% of the gross revenues

from operations in India without any deduction. In the circumstances, the DRP

had rightly applied Rule 10 of the Income Tax Rules, 1962 to calculate the

profits of the Assessee.


12.7 In respect of the Revenue's appeals, Mr Sahni con tended that the

contracts in question were composite contracts and all activities were closely

linked. Thus, the contract could not be split between the activities carried out

overseas and activities carried out in India. He further contended that the



ITA 143/2013 & Other Connected Matters                                    Page 22 of 54
ownership of the platforms and other material was transferred to ONGC only on

ONGC issuing a certificate of completion and acceptance of work. Thus, the

Assessee's contention that the income from activities conducted in relation to

design, procurement of material and fabrication of the platforms, was not

attributable to the PE in India was erroneous.


12.8 Mr Sahni sought to distinguish the decisions of the Supreme Court in the

cases of Ishikawajima-Harima Heavy Industries Ltd. v. DIT: (2007) 288 ITR

408 (SC) and Hyundai Heavy Industries (supra) by contending that whilst the

situs of transfer of properties in those cases was outside India; in the present

case, possession of the platforms was handed over to ONGC in India.


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 especially :


ITA 143/2013 & Other Connected Matters                                  Page 23 of 54
                 (a)      a place of management;

                 (b)      a branch;

                 (c)      an office;

                 (d)      a factory ;

                 (e)      a workshop ;

                 (f)      a mine, an oil or gas well, a quarry or any other
                          place of extraction of natural resources ;

                 (g)      a farm or plantation ;

                 (h)      a building site or construction or assembly project or
                          supervisory activities in connection therewith, but
                          only where such site, project or activity continues
                          for a period of more than 9 months ;
                 (i)      the furnishing of services including consultancy
                          services by an enterprise of a Contracting State
                          through employees or other personnel in the other
                          Contracting State, provided that such activities
                          continue for the same project or connected project
                          for a period or periods aggregating more than 9
                          months within any twelve-month period.
        3. Notwithstanding the preceding provisions of this Article, the
        term "permanent establishment" shall be deemed not to include :
                 (a)      the use of facilities solely for the purpose of storage,
                          display or delivery of goods or merchandise
                          belonging to the enterprise ;

                 (b)      the maintenance of a stock of goods or merchandise
                          belonging to the enterprise solely for the purpose of
                          storage, display or delivery ;
                 (c)      the maintenance of a stock of goods or merchandise
                          belonging to the enterprise solely for the purpose of
                          processing by another enterprise ;
                 (d)      the maintenance of a fixed place of business solely
                          for the purpose of purchasing goods or merchandise,
                          or of collecting information, for the enterprise ;


ITA 143/2013 & Other Connected Matters                                           Page 24 of 54
                 (e)      the maintenance of a fixed place of business solely
                          for the purpose of carrying on, for the enterprise, any
                          other activity of a preparatory or auxiliary character.

        4. Notwithstanding the provisions of paragraphs (1) and (3),
        where a person - other than an agent of independent status to
        whom paragraph (5) applies - is acting on behalf of an enterprise
        and has, and habitually exercises in a Contracting State an
        authority to conclude contracts on behalf of the enterprise, that
        enterprise shall be deemed to have a permanent establishment in
        that State in respect of any activities which that person
        undertakes for the enterprise, unless the activities of such person
        are limited to the purchase of goods or merchandise for the
        enterprise.
        5. An enterprise of a Contracting State shall not be deemed to
        have a permanent establishment in the other Contracting State
        merely 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. Sub-

paras (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.


ITA 143/2013 & Other Connected Matters                                          Page 25 of 54
15.     In order to determine whether an enterprise has a PE within the meaning

of Article 5 of the DTAA, it would be necessary to consider the scheme of

Article 5. Paragraph 1 of Article 5 provides an overarching general definition of

the expression `Permanent Establishment' (PE). It defines a PE to mean a fix ed

place of business through which the business of an enterprise is wholly or

partially carried on. It is clear from the aforesaid definition that the expression

`Permanent Establishment' entails (a) a fixed place of business; and (b) business

of the enterprise being carried on wholly or partially through the said fixed

place of business. These two conditions must necessarily be satisfied for the

existence of a PE. In addition, the word permanent in the term `Permanent

Establishment' indicates that there should be some degree of permanency

attached to the fixed place of business before the same can be construed as a PE

of an enterprise. The word permanent does not imply for all times to come but

merely indicates a place which is not temporary, interim, short-lived or

transitory. In Re. P. No. 24 of 1996: (1999) 237 ITR 798 (AAR), the Authority

for Advance Ruling referred to Baker's "Double Taxation Conventions and

International Tax Law, second edition", wherein the author had cited the

decision in Henriksen v. Grafton Hotel Limited: (1943) 11 ITR (E.C.) 10

(CA) and explained that the expression "permanent" is relative and not

synonymous with "everlasting"; the AAR ruled that it was used only in

"contradistinction to something fleeting, transitory, temporary or casual".




ITA 143/2013 & Other Connected Matters                                   Page 26 of 54
16.     Paragraph 2 of Article 5 of the DTAA provides for an inclusive definition

of the term "Permanent Establishment" and specifically lists out places of

business that fall within the meaning of that expression. The use of the word

`especially' underscores the intention of the authors of the treaty to remove any

doubts that the places listed in sub-paras (a) to (i) fall within the definition of

the term `Permanent Establishment'. Normally an inclusive definition is used to

expand the width of the term sought to be defined, however, that does not

appear to be the principal intent in drafting paragraph 2 of Article 5 of the

DTAA. Read in the context of the other provisions of Article 5, paragraph 2

clearly indicates that it has been used as an explanatory provision to specifically

include the species of places of business that would constitute a PE of an

enterprise. In this view, paragraph 1 and 2 of Article 5 of the DTAA

complement each other. Thus, all classes of PEs as specified in various sub-

paras 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.




ITA 143/2013 & Other Connected Matters                                   Page 27 of 54
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

paragraph 2 of the said Article, the same would, nonetheless, not be construed

as a PE of an enterprise, if it falls within any of the exclusionary clauses

contained in sub-paras (a) to (e) of paragraph 3 of Article 5 of the DTAA.


18.     Paragraph 4 of Article 5 of the DTAA provides for a legal fiction to

include an agent (other than an agent of an independent status) to be a PE of the

principal enterprise. Paragraph 4 also begins with a non-obstante clause. Thus,

even though an agent may not stricto senso fall within the definition of a

`permanent establishment' as defined under paragraph 1 and/or paragraph 2 of

Article 5 of the DTAA, yet it would be deemed that a permanent establishment

of an enterprise exists if the business of an enterprise is carried on through an

agent as described under paragraph 4 of the DTAA. Paragraph 5 of Article 5

provides for an exclusion to the application of paragraph 4 and the agents of a

principal enterprise as described in paragraph 5 of the DTAA would be

excluded from the scope of paragraph 4 of Article 5 of the DTAA.



ITA 143/2013 & Other Connected Matters                                     Page 28 of 54
19.     The controversy whether the Assessee had a PE in India during the

relevant period has to be answered in the context of the aforesaid provisions of

the DTAA. Concededly, the Assessee had established a Project Office at

Mumbai in 2005. This was also intimated to the Reserve Bank of India by a

letter dated 24th January, 2006. It is also not disputed that the Assessee did carry

on part of its business through its Project Office. In the circumstances, the

conditions as spelt out in para 1 and paragraph 2(c) of Article 5 of the DTAA

are satisfied. However, the matter does not rest here; it is next to be seen

whether any of the exclusionary clauses of paragraph 3 of Article 5 of the

DTAA are applicable. As stated before, Paragraph 3 of Article 5 of the DTAA

begins with a non-obstante clause and, thus, the exclusion provided under

paragraph 3 of Article 5 of the DTAA would override paragraph 1 and 2 of

Article 5 of the DTAA. Thus, even though the Assessee's Project Office

established in Mumbai falls within the definition of PE in terms of paragraph 1

and 2 of Article of DTAA, it would still have to be seen whether it stands

excluded under paragraph 3 of Article 5 of the DTAA. Clause (e) of paragraph

3 of Article 5 of the DTAA is relevant and it expressly provides that

notwithstanding the provisions of paragraph 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.


ITA 143/2013 & Other Connected Matters                                    Page 29 of 54
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 of India on 24th

January, 2006. The said office was established as a `project office' within the

meaning of Section 2(f) of the Foreign Exchange Management (Establishment

in India of Branch or Office or Other Place of Business) Regulations, 2000. The

definition of `project office' expressly excludes liaison office as defined under

Section 2(e) of the said Act. `Liaison Office' and `Project Office' are defined

under Clause (e) and (f) of Section 2 of the said Act as under:-


           "(e) `liaison office' means a place of business to act as a channel of
          communication between the principal place of business or Head
          Office by whatever name called and entities in India but which does
          not undertake any commercial/trading/industrial activity, directly or



ITA 143/2013 & Other Connected Matters                                      Page 30 of 54
          indirectly, and maintains itself out of inward remittances received
          from abroad through normal banking channel;

          (f) `Project Office' means a place of business to represent the
          interests of the foreign company executing a project in India but
          excludes a Liaison office."


22.     It is apparent from the plain reading of the aforesaid definitions that

whereas a liaison office can act as a channel of communication between the

principal place of business and the entities in India and cannot undertake any

commercial trading or industrial activity; a project office can play a much wider

role. Regulation (6)(ii) of the aforesaid regulations mandates that a `project

office' shall not undertake or carry on any other activity other than the "activity

relating and incidental to execution of the project". Thus, a project office can

undertake all activities that relate to the execution of the project and its function

is not limited only to act as a channel of communication.


23.     The Assessee was required to open a project office in India for the

purposes of executing the contract in question. Clause 3.2.1 of the 4WPP

Contract, inter alia, provides that no payments would become due and payable

to the Assessee until a copy of permission from the Reserve Bank of India for

opening a project in India was submitted. Clause 3.2.1 of the 4WPP Contract is

reproduced below for ready reference:-


          "Pending completion of the whole Works, provisional progressive
          payments for the part of the Works executed by the Contractor
          shall be made by Company on the basis of said work completed
          and certified by the Company's Representative as per the mile-


ITA 143/2013 & Other Connected Matters                                     Page 31 of 54
          stone 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 Office had no role

to play in the execution of the activities under the Contracts and no other

business of the Assessee was carried on through the Project Office. The Project

Office was manned by three employees; (i) Ravi K. Prabhakar; (ii) Pavithran;

(iii) Vijayan. While Ravi K. Prabhakar was designated as a Logistics

Coordinator, Pavithran and Vijayan were employed as Office Assistants. The

said persons were only engaged in collecting information from ONGC or ASL

and transmitting the same to the Assessee's office in Abu Dhabi and similarly

transmitting communications from Assessee's office in Abu Dhabi to ONGC


ITA 143/2013 & Other Connected Matters                                  Page 32 of 54
and ASL. It is claimed that the abovenamed three employees were simple

graduates and were not capable for participating in the execution of the work

undertaken. The DRP had observed that Sh. M.N. Shah, Sh. M. Karkera, Sh.

C.G. Pillai, Sh. P.K.G. Nair and Sh. R.L. Kulkarni, who were employees of the

Project Office of the Assessee, had attended the kick-off meeting with ONGC

on 16th December, 2005 and had also signed the minutes of that meeting. The

DRP had proceeded on the basis that this fact was not disputed. The ITAT had

also concurred with the aforesaid finding. However, it is seen that the Assessee

had repeatedly pointed out that persons named were not employees of the

Project Office. Further, there is no material which would support the findings

that Sh. M.N. Shah, Sh. M. Karkera, Sh. C.G. Pillai, Sh. P.K.G. Nair and Sh.

R.L. Kulkarni were employees at the Project Office.


25.     In our view, in absence of any material, observations made with regard to

the employees of the Project Office being present at the meeting cannot be

sustained. Similarly, there is also no material that the employees of the Project

Office had participated in review of the engineering documents done in Mumbai

or had participated in the discussions or approval of the designs submitted to

ONGC. In absence of any material evidence to controvert the Assessee's claim

that its Project Office was only used as a communication channel, the same has

to be accepted. Thus, the next aspect to be considered is whether acting as a




ITA 143/2013 & Other Connected Matters                                  Page 33 of 54
communication channel would fall within the exception of clause (e) of

paragraph 3 of Article 5 of the DTAA.


26.     The language of sub-para (e) of paragraph 3 of Article 5 of the DTAA is

similar to the language of sub-para (e) of paragraph 4 of Article 5 of the Model

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 cheques

were drawn on banks in India. The said cheques were couriered or dispatched to


ITA 143/2013 & Other Connected Matters                                        Page 34 of 54
the beneficiaries in India keeping in mind the instructions of the remitters. This

Court held that the said activity was only in aid and support of the main activity

of the Assessee in that case and, thus, such activity was auxiliary in character.

In DIT (International Taxation) v. Morgan Stanley & Company Inc.: (2007)

292 ITR 416 (SC), the Supreme Court held that the back office operations

carried on at an office would fall within the exclusionary clause of Article

5(3)(e) of the Treaty between India and United States which is also identically

worded as Article 5(3)(e) of the DTAA.


28.     The Black's Law Dictionary defines the word 'auxiliary' to mean as

"aiding or supporting, subsidiary". The word 'auxiliary' owes its origin to the

Latin word 'auxiliarius' (from auxilium meaning 'help'). The Oxford Dictionary

defines the word 'auxiliary' to mean "providing supplementary or additional

help and support". In the context of Article 5(3)(e) of the DTAA, the expression

would necessarily mean carrying on activities, other than the main business

functions, that aid and support the Assessee. In the context of the contracts in

question, where the main business is fabrication and installation of platforms,

acting as a communication channel would clearly qualify as an activity of

auxiliary character - an activity which aids and supports the Assessee in

carrying on its main business.




ITA 143/2013 & Other Connected Matters                                  Page 35 of 54
29.     In view of the above, the activity of the Assessee's Project Office in

Mumbai would clearly fall within the exclusionary clause of Article 5(3)(e) of

the DTAA and, therefore, cannot be construed as the Assessee's PE in India.


30.     We are also unable to accept Mr Sahni's contention that in view of the

decision in the case of Goetze (India) Ltd. (supra), the Assessee was not

entitled to contend that it had no PE in India for several reasons. First and

foremost, in the present case, the Assessee's return was not accepted and the AO

questioned the attribution of income to the Assessee's PE. In such

circumstances, it would be open for the Assessee to point out that its office in

India did not carry out any activities to which any income from the project

could be attributed. In order to determine the Assessee's income attributable to

its Project Office at Mumbai, 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.




ITA 143/2013 & Other Connected Matters                                  Page 36 of 54
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, nonetheless, we consider it appropriate to do so.


33.     In terms of clause (h) of paragraph 2 of Article 5 of the DTAA, "a

building site or construction or assembly project or supervisory activities in

connection therewith" would also constitute a PE of an enterprise subject to that

site, project or activity continuing for a period of atleast nine months. Clearly,

the purpose of the said clause is also to include a building site or a construction

or an assembly project as a PE by itself. On a plain reading, a PE constituted by

a building site or a construction or an assembly project, would commence on the

commencement of activities relating to the project or site. The said clause is

also to be read harmoniously with paragraph 1 of Article 5 of the DTAA which

necessarily entails a fixed place of business from which the business of an

enterprise is carried on. Thus, a building site or an assembly project could be

construed as a fixed place of business only when an enterprise commences its

activity at the project site. An activity which may be related or incidental to the


ITA 143/2013 & Other Connected Matters                                      Page 37 of 54
project but which is not carried out at the site in the source country would

clearly not be construed as a PE as it would not comply with the essential

conditions as stated in paragraph 1 of Article 5 of the DTAA. It is necessary to

understand that a building site or a construction assembly project does not

necessarily require an attendant office; the site or the attendant office in respect

of the site/project itself would constitute a fixed place of business once an

Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of

Article 5 to be applicable, it is essential that the work at site or the project

commences ­ it is not relevant whether the work relates to planning or actual

execution of construction works or assembly activities. Preparatory work at site

such as construction of a site office, a planning office or preparing the site itself

would also be counted towards the minimum duration of a PE under Article

5(2)(h) of DTAA. In a given case, establishment of an office or any work which

directly serves the operations at site may also be construed as a part of the

building site, or construction or assembly project. The essence of a PE under

Article 5(2)(h) is a building site or a construction or assembly project and the

activities of an enterprise relating thereto in the 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":-




ITA 143/2013 & Other Connected Matters                                     Page 38 of 54
           "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 duration of a

permanent establishment would commence with the performance of business

activities in connection with the building site or assembly project.


36.     The activities at site carried on by any contractor through a sub-contractor

would not count towards the duration of the contractor's PE , as in that case, the

construction site or project cannot be construed as a fixed place of business of

the contractor and would fail one of the essential tests of paragraph 1 of Article

5 of the DTAA. This, of course, would not hold good if the contractor's office

or establishment in the source country (i.e. where the site/project is located) is

also involved alongwith the sub-contractor.


37.     In the present case, the Assessee claims that the survey was conducted by

an independent third party engaged by the Assessee and that too for a period of



ITA 143/2013 & Other Connected Matters                                     Page 39 of 54
9 days in one instance and 27 days in another (from 27.02.2006 to 07.03.2006

and 25.04.2006 to 21.05.2006). The Assessee commenced its activities at site

when the barges entered into the Indian territory on 19.11.2006 and such

activities relating to the installation, testing and commissioning of the platforms

continued till 27.04.2007. Thus, the Assessee's activity at site would

indisputably commence on 19.11.2006 and continue till 20.04.2007, that is, for

a period of less than nine months.


38.     The initial activities at site were carried on by an independent sub-

contractor appointed by the Assessee. If the commencement of the activities of

the sub-contractor is considered, the same commenced on 27.02.2006 and were

concluded by 21.05.2006. It is seen that there is a large gap between the

commencement of initial activities of pre-engineering survey and the

commencement of installation works. The issue to be addressed is whether

such interruptions should be excluded from the minimum duration period. An

interruption in the normal course of activities such as weekly day off would

undoubtedly be included in the duration of the PE but in cases where

interruption exceeds substantial periods which represent cessation of the

activities at site, it would be difficult to accept that the building/project site

continues to represent a fixed place of business of an enterprise. Reference to

the commentary by Klaus Vogel on Double Taxation Conventions on this







ITA 143/2013 & Other Connected Matters                                   Page 40 of 54
aspect is also instructive. The relevant passage from the said text is quoted

below:-


           "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. In the facts,

where an enterprise is not granted access to the site for a long duration and

carries on no activity at site during that period, the site could hardly be

construed as the fixed place of business of an Assessee during that period.




ITA 143/2013 & Other Connected Matters                                    Page 41 of 54
40.     We are also unable to accept the Revenue's contention that since the

duration of the project itself exceeded nine months, the duration test under

Article 5(2)(h) of DTAA would stand satisfied. A careful reading of Article

5(2)(h) of DTAA indicates that it is necessary that the `site, project or activity

continues for a period of more than nine months'. It is an implicit condition that

the enterprise should be involved at the site or involved in the assembly project

in the source country. In the present case, the installation activities lasted from

19.11.2006 to 27.04.2007, which is much less than the minimum period of nine

months.


41.     Even if the time spent by ASL in conducting the pre-engineering, pre-

design survey is included, the duration of the project activities in India would

not exceed nine months. The Assessee's Project Office is inextricably linked to

the project. Therefore, if the duration of the project activities in India was less

than nine months, it cannot be held that the Assessee had a PE in India under

Article 5(2)(h) of the DTAA.


42.     In view of the above, answer to the second question is in the negative,

that is, in favour of the Assessee and against the Revenue.


43.     The next issue to be addressed is whether ASL could be construed as a

DAPE of the Assessee within the meaning of Article 5(4) of the DTAA. The

Assessee has placed on record the Director's Report and the final accounts of

ASL for the financial year ended 31st March, 2007. The same indicates that

ITA 143/2013 & Other Connected Matters                                   Page 42 of 54
during the year 2006-07, ASL earned a gross income of Rs.54.42 crores. The

Director's of ASL in their report for the year 2006-07, inter alia, reported as

under:-


        "....Your Directors are pleased to inform that during the year under
        review the company continued its regular activities i.e. Shipping,
        Ship       Owning/Chartering,     Barge     Owning,      Lighterage,
        Transportation, Offshore Marketing/Technical Consultancy and
        Offshore Fabrication and Installation work. The Company provides
        all logistic and consultancy support to NPCC, Abu Dhabi, Valentine
        Maritime (Gulf) LLC, Abu Dhabi and Valentine Maritime
        (Mauritius) Ltd., Mauritius and other Indian Companies 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 for execution of Erection &
        Pre-commissioning of Offshore Crude Handling Project of Essar
        Port Terminals, Vadinar. The Services to all the above projects were
        rendered to the satisfaction of clients."




ITA 143/2013 & Other Connected Matters                                  Page 43 of 54
44.     It is apparent from the above that ASL's activities were not limited to

providing services to the Assessee but extended to various other activities. ASL

also provided logistics and consultancy support to various companies other than

the Assessee. The Director's Report also clearly indicates that the activity of

providing offshore marketing/technical consultancy and offshore fabrication

and installation work were amongst the regular activities carried on by ASL.


45.     The Assessee has also placed on record a copy of the consultancy

agreement dated 26th December, 1994 entered into with ASL. Clause 1, 2 & 3

are relevant and are quoted below:-


          "Clause 1
          The Consultant hereby agree to act as the sole and exclusive
          Consultant for the Principal in India and shall not represent any
          competitor to the Principal nor act in a manner which could be
          detrimental to the Principal's interests.
          Clause 2
          The Principal shall in its name bid and execute contracts related to
          the works above defined.
          Clause 3
          The Consultant shall provide the Principal with the following
          services:
          (a) Assistance in the gathering of relevant market information.
          (b) Assistance in obtaining works and active representation,
              promotion and support of the Principal's activities in India.
          (c) Assistance in obtaining services and facilities in India."




ITA 143/2013 & Other Connected Matters                                      Page 44 of 54
46.     It is clear from the above that ASL had agreed to act as a `sole and

exclusive' consultant for the Assessee in India and had further agreed not to

represent any competitor of the Assessee or act in a manner detrimental to the

Assessee's interest. The recital to the agreement also indicates that the Assessee

was desirous to undertake offshore contract work in India and had, therefore,

appointed ASL as its sole and exclusive consultant in India. The consultancy

agreement did not fetter ASL to carry on its regular activities including

providing consultancy services to persons other than the Assessee's

competitors. The financial accounts of ASL also clearly indicate that it had

earned substantial income other than the remuneration received/receivable from

the Assessee.


47.     In view of the above, the ITAT's conclusion that 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.



ITA 143/2013 & Other Connected Matters                                  Page 45 of 54
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) and 5(5) of the

DTAA which reads as under:-


          "4. Notwithstanding the provisions of paragraphs 1 and 2, where
          a person ­ other than an agent of independent status to whom
          paragraph 5 applies ­ is acting on behalf of an enterprise and has,
          and habitually exercises in a Contracting State an authority to
          conclude contracts on behalf of the enterprise, that enterprise shall
          be deemed to have a permanent establishment in that State in
          respect of any activities which that person undertakes for the
          enterprise, unless the activities of such person are limited to the
          purchase of goods or merchandise for the enterprise.
          5. An enterprise of a Contracting State shall not be deemed to
          have a permanent establishment in the other Contracting State
          merely 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 person 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 an independent
          status within the meaning of this paragraph."


49.     A plain reading of paragraph 4 of Article 5 indicates that for a person to

constitute a DAPE, the agent must (a) not be an agent of independent status to



ITA 143/2013 & Other Connected Matters                                     Page 46 of 54
whom paragraph 5 applies; (b) the agent acts on behalf of the enterprise; and (c)

the agent habitually exercised authority to conclude contracts on behalf of the

enterprise.


50.     By virtue of paragraph 5 of Article 5 of the DTAA, an enterprise shall not

be deemed to have a permanent establishment merely because it carries on

business in a contracting state through a broker, general commission agent or

any other agent of an independent status provided that such persons act in their

ordinary course of business. Thus, even an independent agent who acts outside

its ordinary course of business would fall outside the scope of paragraph 5 of

Article 5 of the DTAA. Therefore, in order to consider whether an agent of an

enterprise falls within the ambit of paragraph 5 of Article 5 of the DTAA, it is

necessary to consider whether (a) the agent is one of an independent status and

(b) whether he is acting on behalf of the enterprise in the ordinary course of its

business. Applying the aforesaid tests in the facts of the present case, it is at

once clear 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




ITA 143/2013 & Other Connected Matters                                   Page 47 of 54
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 ASL was habitually

authorised to conclude contracts on behalf of the Assessee.


52.     In view of the above, ASL cannot but be considered as an agent of

independent status to whom paragraph 5 of Article 5 of the DTAA applies. In

this view, ASL would not constitute a DAPE of the Assessee in India.


53.     In view of our conclusion that the Assessee did not have a permanent

establishment in India, the question of attributing any income of the Assessee to

the PE does not arise. However, the ITAT has erroneously held that the

Assessee has a PE in India. Although the ITAT has held so, it has not quantified

the income attributable to the PE. Thus, the answer to question no.4 framed in

the Assessee's appeal is answered in favour of the Assessee and against the

Revenue.

ITA 143/2013 & Other Connected Matters                                  Page 48 of 54
54.     Insofar as the question whether the decision of the ITAT is contrary to

Article 7(6) of the DTAA is concerned, we find that the AO as well as the ITAT

had provided reasons for adopting the method of computation of the income of

the Assessee. The ITAT had also found that there was no basis for the method

adopted by the Assessee. This, in our view, would be a sufficient reason for not

following the method of computation of taxable income as adopted in the

preceding years. Although, the Assessee had claimed that Section 44BB and the

CBDT Instruction No.1767 provided the legal basis for the method of

computation of taxable income adopted by the Assessee, the same is clearly

erroneous. Section 44BB of the Act provides for levying tax on a presumptive

basis and 10% of the receipts are presumed to be the profits of a foreign

company rendering the services specified therein. There is no scope for

allowing any deduction while computing tax on a presumptive basis. The

method of computation as adopted by the Assessee is also not supported by the

CBDT Instruction No. 1767 referred to by the Assessee.


55.     In view of the above, question no.5 framed in the Assessee's appeals is

answered in the affirmative, that is, in favour of the Revenue and against the

Assessee.


56.     The question framed in the appeals preferred by the Revenue essentially

pertains to the attribution of income arising from the contracts in question for

the purpose of taxing the same under the Act. In the present case, we have


ITA 143/2013 & Other Connected Matters                                 Page 49 of 54
concluded that the Assessee does not have a PE in India in terms of the DTAA,

thus, the question of splitting the business 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. If income of a foreign company is found to

be taxable under the Act, it is next to be seen whether the same can still be taxed

in terms of a bilateral agreement, if any, between India and the country where

the foreign company is domiciled. Thus, without going into the question


ITA 143/2013 & Other Connected Matters                                   Page 50 of 54
whether the incomes attributable to design, procurement of material and

fabrication of platforms are otherwise taxable under the Act and assuming it is

so, it would still have to be determined whether such income is taxable under

the Act in terms of the DTAA and, for the aforesaid purpose, it is necessary to

refer to Article 7 of the DTAA, which provides for taxation of business profits.

Paragraphs 1, 2 & 3 of Article 7 are relevant and are reproduced as under:-


           "1.    The profits of an enterprise of a Contracting State shall be
                 taxable only in that State unless the enterprise carries on
                 business in the other Contracting State through a permanent
                 establishment situated therein. If the enterprise carries on
                 business as aforesaid, the profits of the enterprise may be
                 taxed in the other State but only so much of them as is
                 attributable to that permanent establishment.
            2. Subject to the provisions of paragraph (3), where an enterprise
               of a Contracting State carries on business in the other
               Contracting State through a permanent establishment situated
               therein, there shall in each Contracting State be attributed to
               that permanent establishment the profits which it might be
               expected to make if it were a distinct and separate enterprise
               engaged in the same or similar activities under the same or
               similar conditions and dealing wholly independently with the
               enterprise of which it is a permanent establishment.
           3.    In determining the profits of a permanent establishment, there
                 shall be allowed as deductions expenses which are incurred
                 for the purposes of the business of the permanent
                 establishment, including executive and general administrative
                 expenses so incurred, whether in the State in which the
                 permanent establishment is situated or elsewhere, in
                 accordance with the provisions of and subject to the
                 limitations of the tax laws of that State."
59.     It is apparent from the plain reading of the above quoted paragraphs that

only such income as is attributable to a UAE based Assessee's PE in India can



ITA 143/2013 & Other Connected Matters                                     Page 51 of 54
be taxed. In Hyundai Heavy Industries (supra), the Supreme Court had

explained that the only 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 India has entered into
        a tax treaty with a foreign country (Korea, in the present case) then
        in relation to an assessee to whom such tax treaty applies, the
        provisions of the Act shall apply only to the extent to which the
        provisions thereof are more beneficial to the assessee."



60.     In the present case, the consideration of various activities has been

specified in the contracts in question. Annexure C (Contract Price Schedule and

Rental Rates Schedule) specifically assigns value to various activities. It is also

not disputed that the invoices raised by the Assessee specifically mentioned the

work done outside India as well as in India. Thus, even though the contracts in

question may be turnkey contracts, the value of the work done outside India is



ITA 143/2013 & Other Connected Matters                                     Page 52 of 54
ascertainable. There is no dispute that the values ascribed to the activities under

the contracts are not at Arm's Length. There is also no material to indicate that

the work done outside India included any input from the Assessee's PE in India.

The ITAT had considered the contract and in view of the fact that the

consideration for various activities such as design and engineering, material

procurement, fabrication, transportation, installation and commissioning had

been separately specified, the Tribunal rightly held that the consideration for the

activities carried on overseas could not be attributed to the Assessee's PE in

India.


61.      We find no infirmity with the aforesaid view. In the circumstances, the

first two questions framed in the Revenue's appeal are answered in the negative,

that is, in favour of the Assessee and against the Revenue. Since the second

question has been answered against the Revenue, the third question does not

arise for consideration.


62.      In view of the conclusion that the Assessee did not have a PE in India

during the AYs 2007-08 and 2008-09, no income of the Assessee from the

projects in question can be attributed to the Assessee's PE. The assessment

orders dated 26th October, 2010 and 18th November, 2011 for the AYs 2007-08

and 2008-09 respectively as well as the corresponding orders passed by the

ITAT in the corresponding appeals are set aside.




ITA 143/2013 & Other Connected Matters                                   Page 53 of 54
63.     The appeals are disposed of in the above terms. The parties are left to

bear their own costs.




                                                         VIBHU BAKHRU, J




                                                         S. MURALIDHAR, J
JANUARY 29, 2016
RK




ITA 143/2013 & Other Connected Matters                                Page 54 of 54

 
 
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