DTAA permanent establishment rules: specific construction project provision governed, and offshore receipts were not taxable in India.
Article 5(3) of the India-South Korea DTAA governed the construction and installation projects as the specific rule, while Article 5(1) and 5(2) applied only as general permanent establishment provisions. The project work was completed within the treaty period, and the offshore fabrication and other overseas activities were performed outside India before installation. The Mumbai project office had restricted RBI permission and was limited to coordination and execution of approved contracts, so it was not shown to be a fixed place of business constituting a permanent establishment. As a result, the assessee had no permanent establishment in India for the relevant projects, and receipts from outside India operations were not taxable in India.
Issues: Whether the assessee had a permanent establishment in India under Article 5 of the India-South Korea DTAA in respect of the three projects; whether the Mumbai project office constituted a permanent establishment; and whether receipts from outside India operations relating to those projects were liable to tax in India.
Analysis: Article 5(1) and 5(2) define permanent establishment as a fixed place of business and include an office, but Article 5(3) specifically governs building sites, construction, assembly or installation projects and supervisory activities, and applies only where such activities continue for more than nine months. The project work in question was completed within the treaty period, and the offshore fabrication and other work had been carried out outside India before installation in India. The Mumbai office was found to be a project office with restricted RBI permission, confined to coordination and execution of approved contracts, and no material was brought to show that it was a fixed place of business through which the assessee carried on business so as to constitute a permanent establishment under Article 5(1) or 5(2). The earlier decisions in the assessee's own case had already treated Article 5(3) as the specific provision and had rejected taxation of offshore receipts not attributable to an Indian permanent establishment.
Conclusion: The assessee did not have a permanent establishment in India for the relevant projects, and the receipts from outside India operations were not taxable in India.
Final Conclusion: The departmental appeals failed, and the relief granted by the first appellate authority was sustained.
Ratio Decidendi: In a DTAA, the specific rule governing construction or installation projects prevails over the general permanent establishment provisions, and offshore profits are not taxable in India unless attributable to a permanent establishment situated in India.
TaxTMI 
AI Drafter ✕
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