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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