Permanent establishment threshold under the India-USA treaty defeated Indian tax on offshore installation receipts.

AAR considered whether a U.S. resident's offshore pipeline installation receipts were taxable in India under the India-USA DTAA. It applied article 7, which allows taxation of business profits in the source State only where they are attributable to a permanent establishment, and article 5(2)(k), under which an installation project becomes a permanent establishment only if it continues for more than 120 days in a twelve-month period. As the project lasted only 39 days, the permanent establishment threshold was not met. Attempts to invoke broader treaty clauses and article 12(3)(b) were rejected, and section 90(2) supported the more beneficial treaty position.

---

---

Issues: Whether the revenue earned by a United States resident from offshore pipeline installation work in India was taxable in India under article 7 of the India-USA Double Taxation Avoidance Agreement read with article 5, in the absence of a permanent establishment in India.

Analysis: The relevant treaty framework taxed business profits in the source State only to the extent attributable to a permanent establishment situated there. The installation activity was examined under article 5(2)(k), which treats a building site or installation project as a permanent establishment only if it continues for more than 120 days in a twelve-month period. The project lasted only 39 days. The attempt to bring the activity within other clauses of article 5(2), or within article 12(3)(b), was rejected, as the installation project was treated as falling under the specific installation-project clause rather than the broader provisions relied upon by the Revenue. In the absence of a permanent establishment, article 7 did not permit taxation of the business profits in India. Section 90(2) of the Income-tax Act, 1961 also supported application of the treaty to the extent more beneficial to the assessee.

Conclusion: The revenue from the offshore contracts was not taxable in India because the applicant had no permanent establishment in India and the business profits were protected by the treaty.

Final Conclusion: The ruling held that offshore installation receipts of the foreign enterprise were outside Indian tax liability under the treaty regime, as the statutory duration requirement for a permanent establishment was not met.

Ratio Decidendi: Where a treaty specifically subjects installation-project profits to tax only if the project continues beyond the prescribed duration, business profits of a foreign enterprise cannot be taxed in India in the absence of a permanent establishment satisfying that threshold.

---