Permanent establishment and treaty taxation: preparatory mobilisation did not create PE, while interest remained taxable under article 11.

A fixed place or treaty installation constitutes a permanent establishment only if the enterprise's business is actually carried on through it; a mere Indian contract address and preparatory mobilisation or repairs before actual exploration do not satisfy article 5, and the less-than-120-day treaty threshold was not met. As no permanent establishment existed in India, mobilization and demobilization receipts could not be taxed under section 44BB on the basis sought by the Revenue. The interest receipt was treated separately under article 11 of the treaty and remained taxable at 15% of gross interest.

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Issues: (i) whether the assessee had a permanent establishment in India under article 5(1), article 5(2)(a), article 5(2)(c) or article 5(2)(j) of the treaty; (ii) whether mobilization and demobilization receipts could be brought to tax under section 44BB of the Income-tax Act, 1961 in the absence of a permanent establishment; and (iii) whether the interest income was taxable under article 11 of the treaty.

Issue (i): whether the assessee had a permanent establishment in India under article 5(1), article 5(2)(a), article 5(2)(c) or article 5(2)(j) of the treaty.

Analysis: A permanent establishment under article 5(1) requires a fixed place of business through which the business is wholly or partly carried on. A mere Indian address mentioned in the contract was not enough to show that business activities were actually carried on from that place. For article 5(2)(j), the installation or structure must be used for exploration or exploitation of natural resources for more than 120 days; preparatory activity, including repairs and mobilization before actual use for exploration, does not satisfy that condition. The period relevant for the treaty condition began only when the rig was actually used for exploration at the appointed place, and that period was less than 120 days.

Conclusion: The assessee did not have a permanent establishment in India under article 5(1), article 5(2)(a), article 5(2)(c) or article 5(2)(j), and this issue was decided in favour of the assessee.

Issue (ii): whether mobilization and demobilization receipts could be brought to tax under section 44BB of the Income-tax Act, 1961 in the absence of a permanent establishment.

Analysis: Section 44BB operates as a presumptive computation provision only where income is otherwise chargeable in India. Since the assessee was found not to have a permanent establishment in India, the basis for computing business income under the treaty and applying the presumptive mechanism did not arise.

Conclusion: Mobilization and demobilization receipts were not taxable under section 44BB in the manner sought by the Revenue, and this issue was decided in favour of the assessee.

Issue (iii): whether the interest income was taxable under article 11 of the treaty.

Analysis: In the absence of a permanent establishment, the business profits article did not apply. The interest receipt was therefore governed by the specific treaty provision dealing with interest income.

Conclusion: The interest income was taxable under article 11 of the treaty at 15 per cent of the gross interest, and this issue was decided in favour of the Revenue.

Final Conclusion: The assessee succeeded on the core question of permanent establishment, which displaced the Revenue's basis for business taxation and presumptive assessment, while the separate treaty treatment of interest income was upheld.

Ratio Decidendi: A fixed place or treaty installation constitutes a permanent establishment only when the enterprise's business is actually carried on through it, and preparatory or mobilization activities before actual use for exploration do not count toward the treaty threshold period.

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